slides/2012/051512...Scottrade Disclosure - Investors should consider the investment objectives, charges, expense, and unique risk profile of an Exchange Traded Fund …

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Scottrade Disclosure - Investors should consider the investment objectives, charges, expense, and unique risk profile of an Exchange Traded Fund (ETF) carefully before investing. Leveraged and Inverse ETFs may not be suitable for all investors and may increase exposure to volatility through the use of leverage, short sales of securities, derivatives and other complex investment strategies. These funds' performance will likely be significantly different than their benchmark over periods of more than one day, and their performance over time may in fact trend opposite of their benchmark. Investors should monitor these holdings, consistent with their strategies, as frequently as daily. A prospectus contains this and other information about the ETF and should be obtained from the issuer. The prospectus should be read carefully before investing.

Jordan M. Farris SVP, Product Strategy DirexionShares

Speaker:

May 15, 2012

Rules of Engagement for Leveraged ETFs

Ray Fazzi Senior Editor Financial Advisor Magazine

Moderator:


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Important Disclosure Direxion is not affiliated with or employed by Charles Schwab & Co. Inc, and their presentation should not be construed as a recommendation or endorsement by Schwab. You must decide about the appropriateness of their products and services for you. Schwab does not supervise third-party firms and takes no responsibility to monitor the products or services they provide to you.

The views expressed are for general information purposes only and are not intended to provide specific financial, accounting or legal advice. Schwab makes no representation about the accuracy of the information or its appropriateness for any given situation.

The information and opinions contained in this presentation have been obtained from sources believed to be reliable, but no representation or warranty, express or implied, is made that such information is accurate or complete and it should not be relied upon as such. This presentation does not purport to make any recommendation or provide investment advice to the effect that any inverse or leveraged ETF is appropriate for all investment objectives, financial situations or particular needs. Prior to making any investment decisions, investors should seek advice from their advisers on whether any part of this presentation is appropriate to their specific circumstances. This presentation is not, and should not be construed as, an offer or solicitation to buy or sell any products. Expressions of opinion are those of Direxion only and are subject to change without notice.


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Important Disclosure, cont. An investor should consider the investment objectives, risks, charges, and expenses of Direxion Shares carefully before investing. The prospectus and summary prospectus contains this and other information about Direxion Shares. To obtain a prospectus or summary prospectus, please visit www.direxionshares.com. The prospectus should be read carefully before investing.

There is no guarantee of success with any technique, strategy or investment.

The VIX (ticker symbol for the Chicago Board Options Exchange Volatility Index) is an index designed to track market volatility as an independent entity. The S&P 500 Index is a broad-based unmanaged measurement of changes in stock market conditions based on 500 widely held common stocks. One cannot invest in an index.

The views in this presentation are intended to assist the audience in understanding the Funds’ investment methodology and do not constitute investment advice, nor is it a recommendation to buy or sell securities.


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Who uses Inverse and Leveraged ETFs? Inverse and Leveraged ETFs are designed for sophisticated investors who: >  Understand the risks associated with the use of leverage

>  Understand the consequences of seeking daily leveraged investment results

>  Intend to actively monitor and manage their investments

These funds are not suited for conservative investors who: >  Cannot tolerate substantial losses in short periods of time

>  Are unfamiliar with the unique nature and performance characteristics of funds that seek leveraged daily investment results

>  Are long term investors who do not monitor their portfolios frequently

The risks associated with the funds are detailed in the prospectuses and summary prospectus, which include: adverse market condition risk, adviser’s investment strategy risk, aggressive investment techniques risk, concentration risk, counterparty risk, credit and lower-quality debt securities risk, equity securities risk, currency exchange risk, daily correlation risk, daily rebalancing and market volatility risk, depository receipt risk, foreign and emerging markets securities risk, sector securities risk, interest rate risk, inverse correlation risk, leverage risk, market risk, non-diversification risk, shorting risk, small and mid cap company risk, tracking error risk, and special risks of exchange-traded funds, market timing activity and high portfolio turnover risk, investing in other investment companies and ETFs risk, commodities securities risk, geographic concentration risk, valuation time risk, derivatives risk, commodity-linked derivatives risk, wholly-owned subsidiary risk, tax risk, options and futures contracts risks, security selection risk, Debt Instrument Risk, Gain Limitation Risk, Leverage U.S. Government Securities Risk, and Special Risks of Exchange-Traded Funds.

ETFs are bought and sold directly by shareholders in a primary market and trade throughout the day on an exchange. ETFs are bought and sold at market price (not NAV) and are not individually redeemed from the fund. Brokerage commissions will reduce the returns. Market price returns are based upon the midpoint of the bid/ask spread at 4:00 pm Eastern time (when the NAV is normally determined) and also do not represent the returns you would receive if you traded shares at other times.

Investing the funds may be more volatile than investing in broadly diversified funds. The use of leverage by a fund means the Funds are riskier than alternatives which do not use leverage. Aggressive investing would include the use of futures, enhanced betas, and shorting securities. Shorting securities occurs when investors sell securities they don’t own and are committed to repurchasing eventually. Alpha is a measure of performance on a a risk-adjusted basis. The excess return of the fund relative to the return of the benchmark index is a fund’s alpha. Futures are financial contracts obligating the buyer to purchase an asset such as a physical commodity or a financial instrument, at a predetermined future date and price. Swaps are the exchange of one type of asset, cash flow, investment, liability or payment for another.

Distributor: Foreside Fund Services, LLC


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What we’re covering today

>  Leverage – How It Affects Risk and Return

>  Daily Investment Objectives – Tactical Trading Tools

>  Compounding – When Does It Matter?

>  How Can They Be Appropriately Used?

>  Myths

>  Risks: Counterparty

>  The Bottom Line


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Leverage: The Basics >  Leveraged ETFs are a combination of equity baskets and derivatives –

typically swaps or futures contracts.

>  This allows investors to gain exposure to specific indexes and sectors without the need for full dollar-for-dollar investment.

Typical Composition of a 2x ETF

Typical Composition of a 3x ETF

Strategy Equities Derivatives

Bull Funds 80%-100% 200%- 220%

Bear Funds (inverse) 0% 300%

Strategy Equities Derivatives

Bull Funds 80%-100% 100%- 120%

Bear Funds (inverse) 0% 200%


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Daily Investment Objectives: 3x Bull Fund when the underlying index rises When the underlying index rises, fund assets rise. The fund must increase its exposure to the index so the total is once again equal to 300% of the fund’s new level of net assets.

* These performance numbers do not reflect daily operating expenses and financing charges, are hypothetical in nature, and are not representative of actual Direxion Shares returns. There is no guarantee the funds will achieve their objective.

Hypothetical Example Index Rises 1% (in millions)


Leverage: Risk and Return 3x Bull Fund when underlying index rises

These performance numbers do not reflect daily operating expenses and financing charges, are hypothetical in nature, and are not representative of actual Direxion Shares returns. There is no guarantee the funds will achieve their objective.

The incremental return of the investment in this scenario would be $1,500, which is 3x the daily increase in the index (15%) multiplied by the amount of the total initial investment.


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Daily Investment Objectives: 3x Bull Fund when the underlying index declines When the underlying index declines, fund assets decline. The fund must reduce its exposure to the index so the total is once again equal to 300% of the fund’s new level of net assets.

* These performance numbers do not reflect daily operating expenses and financing charges, are hypothetical in nature, and are not representative of actual Direxion Shares returns. There is no guarantee the funds will achieve their objective.

Hypothetical Example Index Falls 1% (in millions)


Leverage: Risk and Return

These performance numbers do not reflect daily operating expenses and financing charges, are hypothetical in nature, and are not representative of actual Direxion Shares returns. There is no guarantee the funds will achieve their objective.

3x Bull Fund when underlying index declines The loss on the investment in this scenario would be $1,500 which is 3x the daily decrease in the index (-15%) multiplied by the amount of the total initial investment.


13 *These numbers do not reflect daily operating expenses and financing charges, are hypothetical in nature, and are not representative of any specific fund’s returns. There is no guarantee the funds will achieve their objective.

The Risks of Compounding Example: Market Rises Steadily The fund’s gains may be larger than expected.


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Example: Market Declines Steadily The fund’s loss may be less than expected.

The Risks of Compounding

*These numbers do not reflect daily operating expenses and financing charges, are hypothetical in nature, and are not representative of any specific fund’s returns. There is no guarantee the funds will achieve their objective.


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Example: Market is Flat, Yet Volatile In volatile markets, the pursuit of daily investment targets will have a negative impact on the ETF's performance for periods longer than a single day.

*These numbers do not reflect daily operating expenses and financing charges, are hypothetical in nature, and are not representative of any specific fund’s returns. There is no guarantee the funds will achieve their objective.

The Risks of Compounding


Compounding: Volatility Matters More is not always better Hypothetical Index experiences higher volatility.

3.84%

-19.99%

Hypothetical Index Hypothetical 3x ETF Hypothetical 3x ETF

Information presented here is hypothetical and meant for illustrative purposes only.


Volatility


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Compounding: Volatility Matters

Index Return = 28.50% 3x Index Return = 85.50% Bull Fund Return = 91.68% Difference = 6.18% -3x Index Return = -85.50% Bear Fund Return = -56.63% Difference = 28.87%

Less is sometimes more The same index experience much less volatility than in the previous example.

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

40.0%

80.0%

60.0%

20.0%

0.0%

-80.0%

-20.0%

-40.0%

-60.0%

120.0%

100.0%

Average Volatility: 20%

Warning! Greater than expected returns are nice, but compounded returns increase (for a bull fund) your exposure levels beyond 3x, making your position more sensitive to future market movements.


Volatility

Information presented here is hypothetical and meant for illustrative purposes only.

Day 1 Day 2 Day 3 Day 4 Day 5 Day 6 Day 7 Day 8 Day 9


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How Are Leveraged & Inverse ETFs Appropriately Used?

Opportunistic Trading

>  Partial Leveraging

>  Hedging

>  Portable Alpha


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Partial Leveraging: Gold Miners Divergence Between Gold Miners Index vs. Gold ergence Between Gold Miners Index vs. Gold

Valu

e/Pr

ice

in D

olla

rs

Spre

ad in

Dol

lars

% Spread Between Gold Miners and Spot Gold

Source: Bloomberg. Past Performance is not indicative of future results.


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Hedging: Fixed Income Exposure >  Short 3x ETFs can provide greater hedging efficiency.

>  Scenario: There is an FOMC (Federal Open Market Committee) announcement today. You are unsure if there will be a rate cut or hike. A significant portion of your portfolio is allocated to Long Term Fixed Income.

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1. Determine hedge

2. Allocate to a 3x Leveraged 20+ Year Treasury ETF

$1 invested = $3 of negative exposure

3. After rate decision, choose to leave or remove hedge

Consider the following example:

There is no guarantee of success with any technique, strategy or investment.


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Portable Alpha: Developed and Emerging Markets Volumes spike as investors seek protection and opportunity in bear funds

Leveraged Emerging Shares Traded

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

12/31

/2010

1/31/2

011

2/28/2

011

3/31/2

011

4/30/2

011

5/31/2

011

6/30/2

011

7/31/2

011

8/31/2

011

9/30/2

011

10/31

/2011

Leveraged Developed Shares Traded

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

12/31

/2010

1/31/2

011

2/28/2

011

3/31/2

011

4/30/2

011

5/31/2

011

6/30/2

011

7/31/2

011

8/31/2

011

9/30/2

011

10/31

/2011


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Myths about Leveraged & Inverse ETFs

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They Exacerbate Market Volatility, Especially At The Close Myth 1:

Bear Funds Exacerbate Market Declines Myth 2:


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Myth 1: Exacerbating Market Volatility Myth: >  End-of-day trading by Leveraged ETFs impacts volatility

Reality: >  Leveraged and leveraged inverse ETFs transact at (or near) the close: buying on

up days if net long; selling on down days if net long.

>  Total net long and short exposure trading at end of the day is smaller than the sum of the bear and bull parts.

>  Market Volatility has been higher at the opening than it has been at the close.

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Arbitrage is the simultaneous purchase and sale of an asset in order to profit from a difference in the price. It is a trade that profits by exploiting price differences of identical or similar financial instruments, on different markets or in different forms. Arbitrage exists as a result of market inefficiencies; it provides a mechanism to ensure prices do not deviate substantially from fair value for long periods of time.


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Volatility at the open is higher than it is at the close

24 Past performance is not indicative of future results. Leveraged ETFs are not market participants in the first half hour of trading, yet volatility is very often at its highest level of the day. Therefore there must be other events that are affecting volatility much more than trading by leveraged ETFs. Top 100 issues: top 100 trading securities. Basis Point is a unit that is equal to 1/100 of 1%, and is used to denote the change in a financial instrument (i.e. 1% change = 100 basis points, and 0.01% = 1 basis point).

Leveraged ETFs do not rebalance at the open Five minute volatility High Volume NYSE Issues (basis points)

Bas

is P

oint

s

140

120

100

80

60

40

20

0%

9:35 10:05 10.35 11.35 12.35 13.35 14.35 15.35 16.05 11:05 12:05 13:05 14:05 15:05

Aug-11

Aug-10

Aug-09

Aug-08

Aug-07

Aug-06


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Myth 2: Intensifying Market Declines Myth: >  Leveraged ETFs are creating net short positions in financials

>  Bear funds create large short exposures

Reality: >  Leveraged ETFs were net long financials through the most volatile markets

>  Short exposure positions of bear ETFs represent only a small fraction of overall short exposure.


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Risks: Counterparty (CP) Exposure Is Counterparty Exposure a Risk? >  Yes

What do you do to mitigate that risk? >  Constant credit analysis of counterparties

>  Diversification of swap exposure to 6 different counterparties

>  Tri-party Collateral Management:

>  Segregated Account held at Custodian for benefit of the counterparty

>  Daily Margin Management

>  Effectively reduces counterparty exposure to 1 day mark to market risk.


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The Bottom Line >  Monitor and Act When Necessary

>  Not meant to be held, unmonitored for long periods

>  Volatile Periods—may need to adjust more frequently

>  Less Volatile Periods—still need to monitor frequently

>  Don’t have the resources, time or inclination? Don’t use them.


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A recording and the slides of this presentation will be available at

http://www.fa-mag.com/etfsmay12

For more information on today’s webinar please contact: Jordan M. Farris SVP, Product Strategy DirexionShares [email protected]

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Program Name: Webinar – Rules of Engagement for Leveraged ETFs

Program ID: 05152012

Hours Granted: 1.00

A recording and the slides of this presentation will be available at

http://www.fa-mag.com/etfsmay12

For more information on today’s webinar please contact: Jordan M. Farris SVP, Product Strategy DirexionShares [email protected]


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slides/2012/051512...Scottrade Disclosure - Investors should consider the investment objectives, charges, expense, and unique risk profile of an Exchange Traded Fund …