Direxion's New Leveraged India Mutual Fund to Compete with INP

By Heather Bell

Direxion Funds has expanded its offering of leveraged mutual funds tracking emerging markets this week with the launch of its India Bull 2X Fund [DXILX], which attempts to capture 200% of the daily price performance of the MSCI India Total Return Index.

That's the same index that underlies the iPath MSCI India Index exchange-traded note (INP). Barclays actually suspended operations of INP last year for several trading days due to the imposition of additional capital controls by regulatory authorities in India that limited foreign investment in publicly traded companies. As a result of the added restrictions on foreign investment, the ETN exhibited profound tracking error in comparison to its underlying index. Barclays has since reinstated most operations to permit the lending of notes and sales from inventory, but it still is not allowing the creation of new units.

That's interesting, of course, because the new Direxion fund invests in INP and derivatives linked to it, as well as other securities, according to Daniel O'Neill, Direxion's chief executive officer and chief investment officer. But it tries to take premiums and discounts into account.

"We monitor the net asset value of INP relative to the traded price and use other instruments available to us through time if we see substantial premiums or discounts developing," he said. He added that Direxion originally had held off launching DXILX out of concern about INP's potential for developing a premium, but that the recent launches of two new India ETFs by WisdomTree (EPI) and PowerShares (PIN) and the existence of two closed-end funds, IIF and IFN, mean there should be enough liquidity and enough ways to gain exposure to the market.

"We monitor the other instruments as well for liquidity and correlation and will use them as necessary to try to ensure tracking," O'Neill said.

According to the prospectus, investor class shares of DXILX charge a net management fee of 1.50%. The prospectus also indicates that the complementary India Bear 2X Fund, which will seek 200% of the inverse of the daily performance of the MSCI India Total Return Index, could charge an investor class fee as high as 6.14%. We certainly hope it comes in lower than that...

Direxion has 23 leveraged and inverse index mutual funds currently trading; the funds are marketed mainly to financial advisors. The firm already has several emerging markets funds-including bull and bear funds tracking China, Latin America and emerging markets as a whole.

View the prospectus for DXILX here.

Comments

[floridadon:]

I start to wonder, do the ETF's drive the Indian market or are the markets driving the ETF's?

2008 Mar 25 12:24 PM

[mbacapitalist:]

floridadon: great question but its hard to say. I keep wondering why the Indian ETF's go up in trading the day following the Indian market's close when the Indian markets tanked. It looks like there isn't really a great correlation. I think INP is down b/c of market conditions mainly, in addition to a string of bad news from the financial giants in the ETN (HDFC and ICICI bank). I'm wondering if INP will tank down to 55-57, while EPI goes below 20. If so, I'll probably get some more shares b/c I think the Indian economy will grow for years to come, even though its still figuring it out. This is all based on a recent trip there so your experience may differ!

2008 Apr 01 12:54 AM

[hepp2:]

The India stock market has been at the whip end of the global volatility which started with the American markets last August. After a rapid rise to 20,000, the Sensex quickly declined to 16,000 two months later. Our site has some interesting analytics on the India ETFs.

2008 Apr 07 03:11 PM