Direxion Daily Energy Bull 2X ETF (ERX): An Overview
Direxion launched the bull and bear lines of the Daily Energy Shares 2X ETF in November 2008. The $700 million AUM Direxion Daily Energy Bull 2X (ERX), is a leveraged ETF that aims to reproduce 200% of the daily returns of the S&P Energy Select Sector Index. In other words, for every 1% gain in the underlying index, ERX attempts to produce a corresponding 2% gain.
Prior to March 31, 2020, ERX attempted to produce a corresponding 3x gain.
- For traders looking for exposure to the energy sector, the Direxion Daily Energy Bull 2x ETF (ERX) provides 200% returns.
- Because it uses leverage, it is not intended for long-term holding, but rather a tool for short-term positioning.
- Prior to 2020, the ERX sought a 3x return. Today it is a 2x return ETF.
Direxion ETF Characteristics
ERX is an open-ended investment company offered through the Direxion Funds family and advised by Rafferty Asset Management, LLC. Like most double-leveraged ETFs, Direxion is actively managed and can come with high costs. Its expense ratio of 1.00% is slightly higher but relatively in line with the industry average for a leveraged and indexed ETF. Fund expense ratios do not include brokerage fees or other trading expenses.
To achieve its correct leverage, ERX also invests in financial instruments not found in the IXE portfolio. These instruments can include derivatives like futures contracts, forward contracts, options on securities, equity caps, floors and collars, swaps, short selling, reverse repurchases, and other ETFs.
Suitability and Recommendations
All investments come with risk, but leveraged ETFs can be particularly risky. Any shareholder of ERX or ERY has exposure to a degree of market risk and volatility that greatly exceeds that of most equities. Due to its heavy weighting in the energy sector, the performance of ERX is highly dependent on oil and gas prices. Investors should closely monitor the price of energy commodities and energy commodities futures.
Direxion is a renowned provider of leveraged and inversely leveraged ETFs, particularly in the double-leveraged space. Its expense limitation arrangement with Rafferty Asset Management extends to all of its fund offerings, which is particularly suitable for investors who prefer actively managed and high-turnover instruments.
The Bottom Line
In general, a 2X ETF is only meant for investors who have exposure to leveraged instruments and are comfortable monitoring their own portfolios with consistency. ERX is not a buy-and-hold play and is not suitable for fixed-income investors. It has a large bid/ask spread and does not have a consistent yield.
ERX has a track record of large upswings and downswings and is risky due to its leverage. Its beta is around 4.5, meaning that it is nearly 5x more volatile than the S&P 500 index. This could serve as a nice satellite holding for competent investors, but it should never make up the core of a balanced portfolio.