Two new double leveraged exchange-traded funds (ETFs) have been listed on the NYSE Arca by Direxion, a short and leveraged specialist, for investors looking for enhanced exposure to the returns on European and Japanese stocks, while maintaining a currency hedge.
Brian Jacobs, President of Direxion Investments.
The Direxion Daily MSCI Europe Currency Hedged Bull 2X Shares ETF (HEGE) seeks to double the daily performance of the MSCI Europe Index, while maintaining a full currency hedge relative to the US dollar, the ‘home’ currency.
Likewise, the Direxion Daily MSCI Japan Currency Hedged Bull 2X Shares ETF (HEGJ) aims to double the daily performance of the MSCI Japan Index, while maintaining a full currency hedge relative to the US dollar.
The MSCI Europe Index is well diversified with 443 constituents and follows large and mid-cap stocks across 15 different countries. The index is currently titled towards the United Kingdom (31.36%), followed by France (14.86%), Switzerland (14.41%), Germany (13.63%), and Spain (5.32%). The major sector weights are financials (22.74%), healthcare (13.78%), consumer staples (13.55%), consumer discretionary (11.41%) and industrials (11.14%). Top holdings include Nestle (2.85%), Novartis (2.69%), Roche (2.29%), HSBC (2.17%) and BP (1.5%).
The MSCI Japan Index currently has 314 constituents and also follows large and mid-cap stocks. The main sectors are consumer discretionary (22.39%), financials (19.42%), industrials (19.36%), information technology (11.19%) and consumer staples (6.78%). The index’s largest constituents are currently Toyota (6.37%), Mitsubishi (3.04%), Softbank (2.01%), Sumitomo Mitsui (1.86%) and Honda (1.84%).
Both indices are weighted by free float-adjusted market capitalization and maintain their currency hedge by selling foreign currencies forward at the 1-month forward rate.
The yen and euro have both seen their value slide against the dollar in recent years. The yen has depreciated from 100 yen per dollar in July 2013 to 123 yen per dollar in mid-June. Similarly, the euro has slid from 0.72 euro per dollar in March 2014 to 0.88 euro per dollar. Part of this can be attributed to quantitative easing programmes employed in both regions. “With the US dollar continuing to demonstrate strength against rival developed-market currencies, mitigating currency risk is a key concern for traders focused on international markets”, said Brian Jacobs, President of Direxion Investments.
Both indices have enjoyed steady gains over the last five years, spurred on by a recovery in these regions as well as monetary stimulus programmes that have had a positive effect on asset prices. This has however also resulted in the value of the respective currencies depreciating. These funds would be well suited for investors who believe these trends will continue.
Although both funds have a stated gross expense ratio of 1.07%, current investors can enjoy a reduced net expense ratio of 0.95% due to an agreed cap on total operating expense until September 2016.
Investors should note that leveraged ETFs are inherently riskier than conventional unleveraged ETFs and investment in these funds should only be pursued by investors who understand the risks.