April 2020 IssueLong scroll reading

Launch Alert: Direxion Flight to Safety ETF

By David Snowball

In real estate, it’s all about location.

In investing, it’s all about timing.

On February 5, 2020, which the Dow at 28,807, Direxion launched the Direxion Flight to Safety Strategy ETF (FLYT). The passive fund tracks an index comprised of gold, large-cap utility stocks, and long-dated US Treasury bonds. It rebalances quarterly, with the least volatile component of the index, based on trailing five-year volatility, receiving the greatest weight.

The initial weightings are roughly 43% bonds, 35% utilities, and 22% gold. Gold is capped at 22.5% of the portfolio. Because they had to put it somewhere, Morningstar benchmarks it against their 50-70% equity allocation category.

Direxion’s argument is that some assets are seen as safe havens, and tend to rise when people flee “risk assets.” They illustrate this tendency by looking at a relatively short period of market history, the events since the financial crisis in 2008.

The fund has risen about 1.0% from inception through March 27, 2020. The Vanguard Total Bond Market ETF (BND) declined 0.81% during the same period.

Magic shield? Haven’t found one yet. Useful balm? Maybe. You need to know that the underlying assets have been bid up by others who’ve already fled. Historically low-interest rates will undercut the appeal of long-term bonds once the crisis passes since any uptick in interest rates will reduce their price.

Here is a 10-year (through 2/28/2020) snapshot of the performance of the three components of FLYT against Vanguard STAR (VGSTX), a 60/40 balanced fund of funds. For simplicity, I targeted Vanguard funds to capture the asset classes but Vanguard shuttered its precious metals fund in 2002. I substituted a middle-of-the-road gold fund for it.

  Annual return Standard deviation Sharpe ratio
Vanguard STAR 8.6% 8.6 0.93
Vanguard Long-Term Treasury VUSTX 7.9% 11.8 0.62
Vanguard Utilities Index VUIAX 12.1 12.0 0.96
Gabelli Gold AAA GOLDX -2.0 32.9 -0.08

The expense ratio is 0.40%.

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About David Snowball

David Snowball, PhD (Massachusetts). Cofounder, lead writer. David is a Professor of Communication Studies at Augustana College, Rock Island, Illinois, a nationally-recognized college of the liberal arts and sciences, founded in 1860. For a quarter century, David competed in academic debate and coached college debate teams to over 1500 individual victories and 50 tournament championships. When he retired from that research-intensive endeavor, his interest turned to researching fund investing and fund communication strategies. He served as the closing moderator of Brill’s Mutual Funds Interactive (a Forbes “Best of the Web” site), was the Senior Fund Analyst at FundAlarm and author of over 120 fund profiles. David lives in Davenport, Iowa, and spends an amazing amount of time ferrying his son, Will, to baseball tryouts, baseball lessons, baseball practices, baseball games … and social gatherings with young ladies who seem unnervingly interested in him.