Direxion’s 1X Attempt Confusing

I have been impressed by Direxion’s entry into the ETF space. Although they have focused on the leveraged and inverse side only, their traction has been considerable. This is primarily due to the 3X innovation they brought to market. Indeed, Direxion successfully outmaneuvered veteran leveraged and inverse player Rydex, by carving out a competitive business to segment leader ProShares, whereas Rydex could not. Besides the vision and innovation attached to Direxion, I believe Direxion has the leading voice of leveraged and inverse ETFs, Direxion President Dan O’Neill. His focused, well‐spoken message and engaging demeanor has positively set apart Direxion’s brand and educational efforts. With all that being said, I have been anticipating Direxion’s move into the traditional ETF space. Today Direxion launched their first 1X ETF, FLYX, an ETF tracking the NYSE Arca Airline Index and surprisingly I find myself confused and disappointed. Here’s why…

I am not confused as to why Direxion launched the industry’s second Airline ETF as I launched the industry’s first Airline ETF, FAA, during my time at Guggenheim (formerly Claymore) and airlines have done well this year. What I am confused about is that Direxion would bring an ETF linked to an index that is materially similar to the current option available. Yes, upon closer examination there is a difference that although slight, needs to be highlighted between the Direxion and Guggenheim funds. Direxion is tracking the NYSE Arca Airline Index and Guggenheim is tracking the NYSE Arca Global Airline Index. The confusion between the closely named indexes and their similar portfolios — two industry publications currently have info saying that Direxion is tracking the Global index — shows how similar the products are. (A quick look at the Southwest, Delta, United, Alaska, Jet Blue and SkyWest airline weightings show about a 50% weight in FAA and around a 40% weight in FLYX.) Perhaps Direxion may counter me by saying that even though there is minimal difference in the index, the price of the Direxion ETF is a bargain versus the Guggenheim ETF. Yes, 55bps is less expensive than 65bps but that difference may be short lived. There are other costs to purchasing an ETF and the trading volume of Guggenheim’s ETF may help narrow that 10 bps discount when trying to buy or sell shares in FAA. More importantly, who is to say that Guggenheim does not reduce fees to match or beat FLYX? In short, where’s the innovation, added value or vision in launching this airline ETF tracking a very similar index? This is a disappointing and confusing first 1X ETF attempt.

I think Direxion’s Dan O’Neill might understand my confusion about this launch. Click here to read Direxion’s FLYX press release. Of particular note is Dan O’Neill’s beginning quote, “Direxion is very focused on continually developing new investment tools that provide sophisticated investors with direct exposure to a multitude of sectors.” This sounds like a mission statement that is consistent with Direxion’s brand…until today. Again I’d point out that FLYX just doesn’t do anything materially new as an investment tool for investors. Am I wrong to expect more from Direxion or is this just a shift in direction? (pun intended)

Could this be a sign that Direxion is seeking to be a low cost provider of 1X ETFs? Are they inspired by Vanguard and Schwab and are entering the continued ETF pricing war I have written about before? Will they now target existing indexes and offer 1X ETFs at 20% discounts to current expense ratios? Or maybe FLYX is just a precursor to a 3X airline family and Direxion designed FLYX to tag along instead of leaving all the 1X airline business for Guggenheim. But why would they target a 1X ETF with only $40 million in assets instead of a larger 1X product where Direxion owns the 3X space already?

Whatever the case, Direxion has the potential to successfully move into 1X ETFs but should do it in a way that lines up with the innovative brand and value added nature of its other products. Simply launching materially similar copies of existing ETFs, slapping on an expense ratio 10bps less and hoping to gain market traction won’t work, is not sustainable and will drag down the Direxion brand. Just look at Rydex’s attempt to launch duplicate leveraged and inverse ETFs at an expense ratio 20bps less than rival ProShares to see how that story played out. (most have been folded)

Direxion, for all its success in the leveraged and inverse ETF world, has me wondering if they have a plan to be a serious player in the 1X world or are just experimenting. My hope is that they are able to deliver “new investment tools” to the 1X ETF land going forward. Time will tell.