Direction's Products:

  • Direction is the sponsor of today's Animal Spirits Talk Your Book episode.
  • They offer leveraged ETFs as trading vehicles for short-term active traders.
  • Their leverage products provide magnified exposure to various underlying indices, such as equity and fixed income benchmarks.
  • The leverage is achieved through a combination of owning physical stocks or using swaps on ETFs/indexes.
  • The leveraged ETFs are not meant to be bought and held long-term, but rather used for short-term trading strategies.

Use of Leverage:

  • Ed Egilinsky emphasizes that leverage should only be used by investors who are not risk-averse and understand the risks involved.
  • Timing is crucial when trading leveraged ETFs due to daily resets and compounding effects.
  • Holding leveraged products beyond one day can result in compounding losses if the trend goes against the investor's position.
  • While some investors may try to catch tops or bottoms with leverage, trend following is a more common strategy among users of these products.

Interest in Bull and Bear Funds:

  • Ed mentions that both bull and bear funds have seen inflows depending on market conditions.
  • In 2022, when bonds and stocks were down, there was increased interest in bear funds as investors sought protection or profit from short positions.
  • However, even during periods of market volatility, there were still inflows into bull funds as some investors bought on dips or tried to time reversals.

Understanding Leverage Mechanics:

  • Ed explains how swap rates and collateral affect the cost of leverage within their ETFs.
  • He also highlights that using packaged ETFs can be more cost-efficient than traditional margin accounts for obtaining leverage exposure.
  • Daily reset of leverage is critical to understand since holding leveraged products longer term can lead to compounding losses or gains based on price trends.

Trend Following vs. Bottom/Top Picking:

  • There are different approaches among traders when it comes to leveraging ETFs.
  • Some traders are trend followers and focus on trading in the direction of the overall trend.
  • Others try to catch tops or bottoms, believing that they can make more money by timing reversals, even though it is a harder strategy to execute successfully.

Trading Team and Turnover:

  • The size and nimbleness of Direction's trading team depend on the liquidity of the underlying indices they track.
  • They ensure that there is orderly market activity with tight spreads for their products.
  • While turnover rates can vary, some funds may see assets turn over within days or weeks due to active trading strategies.

Interest in Fixed Income Products:

  • There has been increased interest in fixed income products as volatility in bond markets has picked up.
  • Investors have shown interest in both bull and bear funds related to long-term treasury bonds (20+ years) and 7-10 year treasuries.
  • TMF, the triple leverage bull fund on 20+ year treasuries, has seen significant inflows this year.

Equal Weight Approach:

  • Direction offers an equal weight NASDAQ 100 ETF (QQQE) as an alternative to heavily weighted tech-focused indices.
  • This approach diversifies exposure across all stocks within the index rather than concentrating on a few dominant companies like Apple or Microsoft.

Direction's Assets:

  • As of now, Direction manages over $30 billion in assets and ranks among the top 20 ETF providers based on assets under management.