Direxion Launches S&P 500 ETF With Managed Futures Overlay for Wary Retail Investors

Maintains 100% S&P 500 exposure while adding a trend-following futures strategy

Buys commodity, currency and bond futures when they rise, sells when they fall

Hedge-fund strategy that preserved gains even in 2008

Direxion, a U.S. asset manager, has launched an exchange-traded fund that overlays the S&P 500 with managed futures, a staple hedge-fund strategy. The product is aimed at investors who are uneasy about how far U.S. stocks have risen but do not want to sell.

According to the financial investment industry on Oct. 9, Direxion listed the Direxion US 500 Plus ETF, ticker SPXP, on the New York Stock Exchange on Oct. 7. On the surface, it looks much like a standard S&P 500 ETF. It invests all of its capital in S&P 500 futures to track the index directly.

The difference is that it runs a second strategy with the same capital. The fund applies a trend-following approach across 21 futures markets, buying assets that are rising and selling assets that are falling, including commodities, currencies and global bonds. Because futures require only margin, a single pool of capital can support both strategies at once. A $10,000 investment effectively gives investors $10,000 of S&P 500 exposure and another $10,000 of trend-following exposure.

Returns are the sum of the two strategies. If the S&P 500 gains 8% and the trend-following sleeve earns 4%, the total return is 12%. If the S&P 500 drops 12% but the trend-following sleeve gains 7%, the loss is limited to 5%. The annual expense ratio is 0.92%.

The industry refers to this approach as managed futures. The term means futures trading run by specialist managers. Firms that use the strategy are known as CTAs, or commodity trading advisors. Rather than analyzing why prices are moving, they follow the price trend itself. Buy and sell decisions are based on preset rules, such as moving-average breakouts.

The strategy drew attention for performing well during market selloffs. During the 2008 financial crisis, the S&P 500 fell 38%, while the BarclayHedge CTA Index, which tracks the average performance of CTAs, rose 14%. Its ability to offset losses has led institutional investors, including pension funds and insurers, to allocate part of their portfolios to the strategy.

Direxion created the product because stocks have risen too far and bonds are no longer providing their usual buffer. The S&P 500 is at a record high, but concerns have grown over concentration in a handful of stocks and stretched valuations. For investors, selling equities also risks missing further gains.

Diversifying into bonds has also become harder. Prices have fallen as yields on 10-year U.S. Treasuries climbed. That has increased demand for a third source of returns beyond stocks and bonds. Trend-following strategies are designed to profit as long as a clear trend emerges, regardless of direction. Moe Sparks, Direxion's chief product officer, said the firm had packaged into a single ETF a strategy that had been too complex for individual investors to run on their own.

Park Ju-yeon, Hankyung.com reporter grumpy_cat@hankyung.com