Tag Archives: etfs

Leveraged Cybersecurity ETFs Are Debuting At A Dangerous Time

Summary Direxion launched two leveraged cybersecurity ETFs this past week. These ETFs may be debuting at a time when the popularity of cybsecurity stocks has already cooled and valuations are still very high. History has taught us the dangers of investors choosing to chase past performance or chasing “hot” stocks. It was probably just a matter of time before Direxion – one of the primary issuer of leveraged and inverse ETFs – jumped on the popularity of cybersecurity stocks. This past week, Direxion launched the Direxion Daily Cyber Security Bull 2X Shares ETF (NYSEARCA: HAKK ) and the Direxion Daily Cyber Security Bear 2x Shares ETF (NYSEARCA: HAKD ) options on the cybersecurity sector. But like many products that get launched after the initial popularity soars, the timing often proves to be a dangerous investor trap. The first ETF to jump on the trend – the PureFunds ISE Cybersecurity ETF (NYSEARCA: HACK ) – has quickly racked up well over $1B in assets and was up over 30% within 8 months of its debut. Cybersecurity stocks have cooled off though thanks to the global economic environment and now the fund is up just marginally since it opened. HACK data by YCharts Followers of behavioral finance will tell you all about investors’ tendency to chase past returns and how it often results in buying high and selling low. You probably won’t be surprised to learn that AUM began ramping up at their fastest pace as cybersecurity stocks were peaking earlier this summer. Just in time for these investors to experience the subsequent pullback. Which is why launching a leveraged cybersecurity ETF right now is dangerous. Investors are still being told in the mainstream media that cybersecurity companies are “hot” and money is still pouring into these products. Even after the recent pullback, many of these cybersecurity companies are trading at very rich multiples. Many of these companies still have yet to turn a profit so measuring them by P/E would be unfair. Instead, let’s use the P/S ratio to try to gauge valuation levels. The S&P 500 as a whole currently trades at a P/S multiple of 1.63. Popular stocks in the sector include Palo Alto Networks (NYSE: PANW ) at 16.98, FireEye (NASDAQ: FEYE ) at 11.13, Fortinet (NASDAQ: FTNT ) at 8.97 and Checkpoint (NASDAQ: CHKP ) at 9.33. While the P/S ratio isn’t necessarily an all-in-one measure, it does go to say that even after the recent pullback cybersecurity companies are still very expensive and could indeed fall much further. Looking back at the Nasdaq bubble in 2000 gives us many examples of investments launched at the wrong time. Take the Jacob Internet Fund (MUTF: JAMFX ). This fund was one of the first mutual funds targeting primarily internet stocks at the time. In the six month period from roughly October 1999 through March 2000, the Nasdaq Composite rose over 175%. The Jacob Internet Fund debuted in December 1999 right as tech stocks were about to hit their peak. What happened next is still a good lesson in the dangers of chasing performance or “hot” stocks. The Jacob Internet rose around 20% in the few months after its debut but by the second half of 2001 the fund had lost around 95% of its 2000 peak value. JAMFX data by YCharts That’s not to suggest that a crash like that is imminent in cybersecurity companies but it does make very clear that jumping into a cybersecurity ETF – especially a leveraged cybersecurity ETF like the two launched last week that are designed to magnify the returns of the sector – could be especially dangerous. Conclusion Direxion is well within their boundaries launching these two ETFs right now but it might not be doing the average investor any favors. These ETFs have a triple whammy of risks – investing in risky cybersecurity stocks, investing in leveraged securities and investing when much of the frothy returns may have already been had. These ETFs are very much a case of “buyer beware” for investors. Disclosure: I am/we are long FEYE. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Catalyst And 361 Capital Soft Closing Futures Funds

By DailyAlts Staff Mutual funds are closed for a variety of reasons, but the most common is probably a lack of sufficient investor interest, normally as the result of poor performance. On the opposite end of the spectrum, funds that become too popular and command too much investor interest must close themselves to new investors to avoid exceeding the maximum capacity of their strategies. This latter type of fund closing is known as a “soft closing,” and two alternative funds – the Catalyst Hedged Futures Strategy Fund (MUTF: HFXAX ) and the 361 Managed Futures Strategy Fund (MUTF: AMFZX ) – recently joined the ranks of funds that have gotten too popular to continue taking investors’ money. Catalyst Hedged Futures Strategy Fund The $1.6 billion Catalyst Hedge Futures Strategy Fund debuted as a private fund way back in 2005 and was subsequently converted to a mutual fund by Catalyst in August 2013. As of August 31, the fund’s year-to-date returns of 7.61% ranked in the top 10% of funds in the Morningstar Managed Futures category, and the fund has shone particularly bright over the past six months, generating gains while most of its peers were in the red. Undoubtedly, this stellar performance contributed to increased interest in the fund, which Catalyst says is “rapidly approaching capacity.” As a result, the Catalyst Hedged Futures Fund will be closed to new investors starting October 31, 2015. Closing the fund will help Catalyst “maintain the integrity of the strategy” and not sacrifice performance, according to a statement. The fund’s existing shareholders – and possibly advisors – will be “grandfathered in” and allowed to add more money to the fund, while prospective new shareholders will have to wait for a “Part 2” version of the fund, set to be ready “in the coming weeks.” The “Part 2” fund will pursue a very similar strategy to the original fund, which distinguished itself from other managed futures funds by being 100% options-based. The new fund will be of interest to investors concerned about a repeat of the 2008 financial crisis, as the original Catalyst Hedged Futures Fund gained nearly 50% during that period, thanks to its virtually nonexistent correlation to stocks and bonds. For more information, visit catalystmutualfunds.com . 361 Managed Futures Strategy Fund Investors interested in gaining exposure to managed futures via the 361 Managed Futures Strategy Fund , which returned 7.87% in the first eight months of 2015 and ranked in the top 8% of funds in its Morningstar category, have until September 30 to jump on board – after that date, the fund will cease taking money from new investors. “Since our founding in 2001, we’ve endeavored to be excellent stewards of our clients’ capital,” said 361 Captial CEO Tom Florence, in a recent announcement. “With that in mind, we’ve put forth great effort into measuring the capacity of our strategies, in order to ensure that asset growth doesn’t degrade return potential.” Like the Catalyst Hedged Futures Strategy Fund, the 361 Managed Futures Strategy Fund will remain open to existing investors. The fund had just over $1 billion in assets under management as of September 8, and the 361 investment team feels that a “soft close” allows capacity for existing clients, but keeping the fund open for new investors would risk hampering performance. One of the features that makes the 361 Managed Futures Strategy Fund so attractive is the low correlation it has exhibited to major asset classes. According to 361 Capital, the fund has had negative correlations to foreign (-0.07) and domestic equities (-0.15), and very low correlations to bonds (0.22), real assets (0.05), and even other managed futures strategies (0.10), from its December 2011 inception through June 30, 2015. For more information, visit the fund page at 361 Capital . Past performance is not necessarily indicative of future performance.

Fund Liquidations: Salient, Ramius And Raylor

By DailyAlts Staff In this edition of Fund Liquidations, notes on four funds that have filed for liquidation: Salient Alternative Beta Fund In a September 2 filing with the Securities and Exchange Commission (“SEC”), the Salient MF Trust said its Board of Trustees had approved a plan to liquidate the Salient Alternative Beta Fund (MUTF: SABFX ). The liquidation date was slated for just a day later, on September 3, and the fund immediately stopped accepting investments from new shareholders. According to Bloomberg , September 14 was the fund’s last day of trading, and its shares closed at a final price of $6.96. The fund debuted in March 2013 at a price of $10.14. Ramius Hedged Alpha Fund The Ramius Hedged Alpha Fund (MUTF: RDRAX ) was liquidated on September 4. Its Board of Trustees made the decision to liquidate in July and notified the SEC of its intentions on July 31. According to Bloomberg , the fund debuted on September 17, 2010 at a share price of $10.02, and closed September 4, 2015 at $8.78, down 11.4% since inception. Year-to-date, through its final day of trading, the Ramius Hedged Alpha Fund returned -11.9%. Ramius Strategic Volatility Fund Ramius also liquidated the Ramius Strategic Volatility Fund (MUTF: RVOAX ) on September 4, after filing its intent to do so with the SEC on July 31. The fund, which debuted in October 2012 at $10 per share, finished its final day of trading at $2.64, down a staggering 73.6% since its inception, according to Bloomberg . The fund closed out 2014 at $3.09, meaning its year-to-date returns through its closing were -14.6%. Raylor Managed Futures Strategy Fund According to a September 9 SEC filing , the Board of Trustees of the Northern Lights Fund Trust III has decided to cease operations of the Raylor Managed Futures Strategy Fund (MUTF: TMFAX ). Effective immediately, management stopped selling shares to new investors and warned its existing shareholders that it would begin to deviate from the fund’s investment objective, in pursuit to a liquidation of the fund planned for October 9. Shares of the Raylor Managed Futures Strategy Fund returned -8.76% in the first eight months of 2015, according to Morningstar, ranking it in the bottom 8% of funds in its category. Over the six months concluding August 31, the fund returned an even-worse -11.55%. Share this article with a colleague