Why Use Relative Value Strategies?

WHAT’S THE DIFFERENCE?

Consider this example of the annualized returns for developed market stocks versus emerging markets stocks from the period of February 1995 through December 2018. On the surface the difference in returns is just under a quarter percent.

Annualized Returns since 1/31/1995 – MSCI Emerging Markets IMI vs. MSCI EAFE

Source: Bloomberg. Date: 1/31/1995 – 12/31/2018. Past performance is not indicative of future results. One cannot invest directly in an index.


Definitions

  • Delta is the ratio comparing the change in the price of the underlying asset to the corresponding change in the price of a derivative.
  • Basis point (BPS) refers to a common unit of measure for interest rates and other percentages in finance. Past performance is not indicative of future results. One cannot invest directly in an index.

 

After nearly 24 years, 24 basis points may seem like a minor difference. So minor perhaps, that it may seem inconsequential to a long-term, asset allocation portfolio whether you choose one over another, especially before considering volatility.

DETAILS CREATE THE BIG PICTURE.

The legendary John Wooden is quoted as saying “…Little things make big things happen”. This may hold weight in the case of relative value investing. This bar chart represents the exact same period as the previous chart (2/95-12/18). The difference is that it details the annual returns, painting a very different picture.

Over time, the more you’re able to take advantage of cyclical relationships between different categories of securities, the more opportunity you’re able to seek. Investors that make the most of these opportunities may be more likely to outperform the market.

The Challenge: Capturing Cyclical Differences in Performance Between Securities

Source: Bloomberg. 1/31/95 – 12/31/18. Past performance is not indicative of future results. One cannot invest directly in an index.

The Challenge: Long-only Limitations

Investors continually consider which group of securities may be poised to move higher or lower, based on any number of economic or capital markets forces. For example, conditions may arise where large cap stocks may benefit from international trade conditions that would create headwinds for small caps, or vice versa. Another scenario may be when currency markets favor one group of economies over others.

But herein lies the conundrum: One of the best ways to take advantage of cyclicality is not only to invest in stocks on the upside, but the ability to access returns from shorting stocks on the downside in order to seek to maximize returns by benefitting from the spread, that is the difference in returns. But for practical or firm-policy reasons, the only options for most advisors are long-only constrained investments.

Challenge Accepted: Access the Short Side.

Introducing Direxion’s Relative Weight ETFs, a suite of exchange traded funds that may provide a simple, cost-efficient, transparent way to potentially profit from specific relative-value investment strategies.

These ETFs track indexes that overweight exposure to a favored group of securities while short selling those in an unfavored group. This allows investors to seek to realize additional return from the favored asset class, while maximizing returns from the performance spread between both asset classes to try to take advantage of the differences in their returns.

 


 

Shares of the Direxion Shares are bought and sold at market price (not NAV) and are not individually redeemed from a Fund. Market Price returns are based upon the midpoint of the bid/ask spread at 4:00 pm EST (when NAV is normally calculated) and do not represent the returns you would receive if you traded shares at other times. Brokerage commissions will reduce returns. Fund returns assume that dividends and capital gains distributions have been reinvested in the Fund at NAV. Some performance results reflect expense reimbursements or recoupments and fee waivers in effect during certain periods shown. Absent these reimbursements or recoupments and fee waivers, results would have been less favorable.

Direxion Relative Weight ETFs Risks – Investing involves risk including possible loss of principal. The ETFs’ investments in derivatives may pose risks in addition to, and greater than, those associated with directly investing in or shorting securities or other investments. There is no guarantee that the returns on an ETF’s long or short positions will produce high, or even positive returns and the ETF could lose money if either or both of the ETF’s long and short positions produce negative returns. Please see the summary and full prospectuses for a more complete description of these and other risks of the ETFs.