Direxion Plans to Launch 1.5x Leveraged Versions of JEPI and JEPQ

Understanding JEPI and JEPQ

Before diving into Direxion's upcoming leveraged ETFs, it's beneficial to understand the foundations laid by JEPI and JEPQ.

At their core, both ETFs are built on active management principles, where they start by selectively curating a portfolio of stocks from their respective benchmarks—the S&P 500 for JEPI and the Nasdaq-100 for JEPQ.

However, the strategy takes a turn towards the innovative with the application of a covered call strategy. Both ETFs sell out-of-the-money options on their respective indexes to generate income. But instead of holding all the underlying stocks necessary for traditional index-covered calls, they employ equity-linked notes (ELNs).

This method allows the ETFs to aim to deliver a substantial portion of their benchmark's total returns, but with an added emphasis on monthly income generation over capital appreciation, all the while striving to maintain lower volatility.

The outcomes of these strategies are quite compelling, with JEPI and JEPQ offering 30-day SEC yields of 9.14% and 6.82%, respectively. This yield focus is particularly attractive for income-seeking investors, especially in an environment where consistent income can be challenging to secure.

Remarkably, despite the complexity of using derivatives and the hands-on approach of active management, both ETFs maintain a very accessible expense ratio of 0.35%.

What the Direxion ETFs want to do

The two newly filed Direxion ETFs aim to offer investors 1.5x leveraged exposure to the returns of JEPI and JEPQ, but with a twist. The leverage in these ETFs is adjusted on a monthly basis, a departure from Direxion's typical daily leverage reset.

This monthly adjustment makes these ETFs potentially more suitable for investors looking to hold them over a longer term, as the leverage won't fluctuate as frequently, reducing the impact of daily market volatility on the leveraged returns.

To achieve this 1.5x leverage, the ETFs plan to directly hold JEPI and JEPQ shares and employ swaps, a type of derivative contract, to augment returns. Swaps were likely chosen for their flexibility and efficiency in obtaining the desired leverage level without the need to physically hold additional amounts of the underlying securities or use cash-borrowing methods.

This approach marks a contrast to some Canadian ETF products, where 1.25x leveraged covered call ETFs often use traditional cash borrowing akin to margin for leverage rather than relying on derivatives like swaps.

While the promise of magnified yields and returns—1.5x over a monthly period, net of fees and drag—is appealing, it also means that any downside will be amplified.

The introduction of leverage to covered call ETFs, traditionally seen as a way to generate higher income with lower volatility, raises some eyebrows. Leveraging these strategies aims to counteract the capped upside of selling calls, yet it's debatable whether it's more economical than simply holding the underlying securities without any options overlays.

Despite my reservations about mixing leverage with covered call strategies, the 1.5x leverage is relatively mild compared to other leveraged products and might attract investors already drawn to the yield and performance of JEPI and JEPQ.

The allure of enhanced returns, even with the associated higher risk, could make these new Direxion ETFs an intriguing option for those chasing yield in their portfolios.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.