Direxion Brings Dynamic Volatility Hedging to ETFs with VEQTOR
Thu, Jul 29, 12:52 PM ET, by Bill Luby
As the ETF space continues to evolve and push into new territory, such as strategy-in-a-box ETFs and more actively managed ETFs (e.g., QAI, ALT, PQY, PQZ, GVT, PSR, RWG), it was only a matter of time before a volatility play was added to the pool of actively managed ETFs. Credit Direxion with being the first to venture into the realm of actively managed ETFs with a strong volatility component. In a recent SEC filing, Direxion unveiled plans to launch an intriguing new ETF under the name of S&P 500 Dynamic VEQTOR Shares. This ETF will seek to track the S&P 500 Dynamic VEQTOR Index, which was launched by S&P on November 18, 2009. So far, so good. Here is where it gets interesting. The VEQTOR index (and ETF) have three components: equity (S&P 500); volatility (S&P 500 Short-Term VIX Futures Index, aka VXX) and cash. Based upon several rules and formulas, the index attempts to derive - on a daily basis - the ideal target volatility allocation. This is accomplished by evaluating realized volatility and implied volatility, determining the implied volatility trend (using 5-day and 20-day IV moving averages) and arriving at a target index volatility allocation based on realized volatility and implied volatility data. Once the target volatility allocation has been determined (the range is from 2.5% to 40.0%), the balance of the index is populated with the S&P 500. Just to make things interesting, the VEQTOR index also has a stop loss provision which specifies that if aggregate losses during any five day business period are 2% or higher, the index will move into a 100% cash position. When the VEQTOR ETF is launched, I will have a lot more to say about this fascinating product. In the meantime, those interested in additional information on the VEQTOR index and ETF should try: For more on related subjects, readers are encouraged to check out:
Disclosure(s): none
SDI Glossary: "ETFs" Definition
SDI Glossary: "Futures" Definition
SDI Glossary: "Short" Definition
SDI Glossary: "VIX" Definition
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