How I Try To Assess New ETFs

Direxion rolled out a suite of ETFs that offer single wrapper access to pair trades. A pair trade is going long one sector or segment or style or factor and so on and then going short something related. So an investor that thinks growth will outperform value could go long a growth fund and sell short a value fund and either profit on the spread between the two if they're right or lose that spread if they're wrong. It is a sophisticated idea and so being cautious makes sense as anything not simple can turn out to be problematic. Here is the suite from Direxion;

In the case of the Relative Weight ETFs the long side of the strategies will be 150% while the short will be 50% which should net out to 100% long. There are some rules of thumb for some of these pairs that might give an indication of when to buy what and they work except for the times that they don't if you know what I mean. One of the rules of thumb is that as the yield curve flattens, growth should outperform value due to the different ways these companies access capital (equity markets versus debt markets). That worked on this go around until about six months ago. The first chart shows SPDR Growth's (SPYG) relative performance versus SPDR Value (SPYV) and starting six months ago growth started to rollover versus value. It is difficult to know what the exact consequence might have been for RWGV (listed in the table) but I don't think it would have been that bad.


Cyclical versus defensives is interesting too. In RWCD tech is the largest long sector and healthcare is the largest short sector. Generally you'd expect defensive companies to lag until very late in the bull market but the chart comparing client holding iShares US Technology (IYW) relative to the Healthcare Sector SPDR (XLV) tells a more complicated story.​

This relationship worked as expected coming off the bottom in 2009 but started rolling over long before the bull market ended...if it's even over yet.

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