KNOW Fundamentals First ETF

Despite the popularity of its leveraged and inverse products, Direxion has begun to make a small move into the unleveraged, long side of the market as well. This hasn’t exactly been well-received by investors in the past as the products failed to attract large numbers of assets for a variety of reasons. Yet, undeterred, Direxion decided to make another play in the immense unleveraged ETF market, with the launch of two funds both tracking an insider sentiment metric.

These two new products look to offer exposure to companies that have favorable trends among company insiders, or those that have the most exposure to a company’s financial and business prospects. If these insiders show increases in expectations for the company (if they are Wall Street analysts) or if they are buying shares in droves (if they are directors or top management in the firm) it could suggest that favorable trends are taking place in these companies making them potential buys. After all, "Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise" said Peter Lynch, the legendary former Manager of the Magellan Fund (read ETFs vs. Mutual Funds).

For investors looking to play companies that are exhibiting these trends, either of the two brand-new Direxion ETFs could be excellent choices. Both of the funds invest in a wide range of companies across sectors and utilize an interesting methodology to select and weight securities. The funds first eliminate all companies that have very aggressive accounting, and then use a ‘quant-weighted’ system to weight securities. In this method, the top 50 rated stocks each receive 2.6% of the portfolio while the bottom 50 stocks that are included are equal weighted, giving the securities a 0.35% allocation each. While the two funds may have a similar style, their focus is very different, as each fund zooms in on a particular corner of the equity market:

All Cap Insider Sentiment Shares (KNOW)

This fund tracks the Sabrient Multi-Cap Insider/Analyst Quant-Weighted Index, offering investors exposure across asset size in the space. The fund seeks relative alpha compared to the S&P 1500 Index and charges investors 65 basis points in fees. In terms of sector exposure, energy firms take the top spot at nearly 24% of total assets and are closely trailed by financials (19.6%), technology (14.8%), and consumer discretionary firms (14.5%). For individual securities, Lincoln National Corp (LNC), Stone Energy (SGY) and MetLife (MET) take the top three spots (read Top There Precious Metal Mining ETFs).

Large Cap Insider Sentiment Shares (INSD)

INSD focuses in on large cap securities that are exhibiting favorable insider trends, following the Sabrient Large-Cap Insider/Analyst Quant- Weighted Index. Instead of seeking alpha compared to the S&P 1500, this fund hopes to outperform the S&P 500, one of the world’s most famous benchmarks. Sector exposure is skewed towards financials (22.1%), energy (21.2%), and consumer discretionary firms (17.4%), while allocating little towards utilities, telecoms, and materials. In terms of individual holdings, Lincoln National takes the top spot and is trailed by MetLife while Valero Energy (VLO) is currently the third biggest holding in the fund.

Competition

Unfortunately for Direxion, these funds are outside of the company’s wheelhouse of leveraged and inverse products and they may face significant competition from the current leader in the space, Guggenheim’s Insider Sentiment ETF (NFO). This fund follows a similar index as its Direxion counterparts, tracking the Sabrient Insider Sentiment Index. This benchmark seeks to identify 100 stocks that reflect favorable corporate insider buying trends and recent earnings estimate increases by Wall Street analysts. While this may sound similar to the brand new KNOW and INSD, investors should note that NFO doesn’t use a quant-weighted index and it charges investors slightly less in fees beating out its Direxion counterparts by about five basis points (read EGShares Reveals Plans For 11 Emerging Market ETFs).

Hopefully for the company’s sake, these new Direxion funds won’t follow the path set out by the short-lived FLYX that tracked the airline industry and failed to unseat FAA as the dominant player in the space (see Airline ETF In Focus As AMR Lands In Bankruptcy). With this unsuccessful product in the background, the launch of these insider-focused funds is curious, and especially so given the comments that company president made after the grounding of the airline ETF. "Direxion's core business and success has been focused in the leveraged and inverse ETF, and other alternative fund space. With declining interest in a non-leveraged airline industry ETF, we feel it is in the best interest of the shareholders to close the fund and stick to the product for which we are best known," said Dan O'Neill, President and CIO of Direxion.

However, the next part of the quote, which discusses the company’s desire to bring ‘innovative investment products’ to the market, could be the reason for this launch despite the funds coming outside the company’s target area. This could especially be true given the relative popularity of the insider sentiment methodology, as demonstrated by NFO, which has amassed more than $100 million in assets. Given the unique weighting methodology for KNOW and INSD, the company may be able to capitalize off of these trends and have a better shot this time around in the unleveraged ETF space.

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LINCOLN NATL-IN (LNC): Free Stock Analysis Report
 
METLIFE INC (MET): Free Stock Analysis Report
 
STONE ENERGY CP (SGY): Free Stock Analysis Report
 
VALERO ENERGY (VLO): Free Stock Analysis Report
 
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