Direxion launches quantitative, rules-based commodity ETF

Mar 31st, 2017 | By | Category: Commodities

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Direxion has launched the Direxion Auspice Broad Commodity Strategy ETF (NYSE: COM).

Direxion launches quantitative, rules-based commodity ETF

According to Direxion, a long/flat approach to commodity investing is potentially more adaptive to whip-sawing market conditions.

The ETF seeks to provide total return that exceeds that of the Auspice Broad Commodity Index (ABCERI) over a complete market cycle. The index utilizes a rules-based process to capture trends in 12 diversified commodity markets (soybeans, crude oil, copper, corn, natural gas, gold, wheat, gasoline, silver, cotton, heating oil, and sugar) using a quantitative methodology.

Positions in each of the 12 commodities can be either long or flat, based on risk reduction where the allocation of individual components is reduced if volatility exceeds certain predetermined risk levels. While allocations are generally reset on a monthly basis, the methodology allows for the ability to make position changes intra-month based on trends.

According to Direxion, long-only commodity strategies have shown to be inconsistent over time because commodity returns are typically cyclical and sporadic, individual commodity sub-sectors tend to perform dissimilarly in different market environments, and significant draw-downs can be damaging to the long-term performance of a portfolio.

Within the inherently volatile commodity markets, a long/flat approach is potentially more adaptive to whip-sawing market conditions.

The below table displays the index’s total returns for the calendar years 2011 – 2016 compared to other major commodity indices.

Direxion Commodity Index

Source: Direxion.

“Investors recognize the value of diversification and inflation protection provided by commodities within a portfolio,” said Tim Pickering, Founder and CIO at Auspice Capital Advisors. “We can seek to maximize these benefits with a tactical strategy that rides the strongest trends for upside potential, then allows for an exit to limit downside risk and volatility while providing for the best risk-adjusted results.”

“Commodities markets are cyclical and tend to revert to the mean,” added Edward Egilinsky, Managing Director at Direxion. “Traditional funds have long-only exposure to commodities, which limits their potential because investors can only benefit when commodity prices rise. Successfully investing in commodities depends on the ability to adapt to change. COM uses a long/flat (cash) approach to take advantage of rising commodity prices, in addition to mitigating risk when individual commodities are in downward trends. That makes it uniquely adaptive to volatile commodities markets.”

The fund also benefits from a 40-Act structure, meaning it avoids the more complicated K-1 tax reporting.

The ETF’s total expense ratio is 0.70% due to a contractual fee waiver in place until September 2017. Its gross expense ratio is 0.71%.

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