Leveraged Homebuilding ETFs Planned By Direxion

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Includes: HOML
by: Zacks Funds

Direxion is a renowned player in the leveraged and inverse leveraged ETF world, alone possessing a major share of this segment of the investing corner. The issuer is in no mood to let go off its strong status as it recently filed up for two leveraged homebuilding ETFs - one regular, another inverse. Let's take a look at the newly filed products.

The Proposed ETFs in Focus

Direxion Daily Homebuilders Bull 2X Shares ETF has been designed to replicate double the daily performance of the S&P Homebuilders Select Industry Index while Direxion Daily Homebuilders Bear 2X Shares ETF does exactly the opposite. This leveraged bear ETF gives the double inverse daily performance of the same index. The bull and bear ETFs charge 1.04% and 0.95% in expense ratio, respectively.

The index follows the performance of a basket of 35 homebuilding companies. The index is not heavily concentrated on the top 10 holdings as it puts just 34% of assets in the portfolio. No stock accounts for more than 3.8% of the total.

How Do These Fit in a Portfolio?

These ETFs could be intriguing choices for those looking for a targeted exposure to the U.S. homebuilding sector. The homebuilding space has been performing well in recent times on sustained economic recovery despite a soft start to the year, a healing job market, moderating home prices and, certainly, low interest rates long prevailing in the country.

As long as these economic attributes remain in place, homebuilding stocks should see a smooth journey. However, investors should not forget that the Fed is on the verge of policy tightening this year. Since homebuilding is an interest rate sensitive sector, it might be in disarray post Fed rate hike. Investors can play the pullback via the bear ETF then.

Competition

As of now, only five ETFs have true focus on the homebuilding sector. Among these, four are regular ETFs. Only one ETF, the ETRACS Monthly Reset 2xLeveraged ISE Exclusively Homebuilders ETN (NYSEARCA:HOML) might pose as a threat to Direxion's proposed leveraged bull ETF, if the latter gets an approval.

Moreover, the expense ratio of the proposed ETF is higher than HOML which charges 85 bps in fees. The difference between daily (in the case of the proposed ETF) and monthly resetting technique (for HOML) might have caused this disparity in expense ratio. However, the coast is clear for the leveraged bear ETF as no such fund has hit the space as yet.

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