Managing Intra- s of ly Leveraged Index Funds
The ly Objective: Direxion 2x ly Leveraged Index Funds The Direxion 2x ly Leveraged Index Funds seek to provide monthly leveraged investment results that are either 200% (or 200% of the inverse) of the returns of the benchmark index (before fees and expenses) from the last trading day of one month to the last trading day of the next month. There is no guarantee that the funds will achieve their objective. The following information is designed to provide details on how to manage intra-monthly purchases of these funds, how to understand the changes in exposure that invariably occur each day of the month, and the tools that Direxion offers to help investors understand current exposure levels so they can make educated decisions about any Leveraged Index Fund purchase they may be considering. ABOUT DIREXION Building on over 17 years of experience with highly liquid, tactical and strategic institutional-style ETFs and Mutual Funds, Direxion provides a wide range of indexbased products that offer directional options, magnified exposure, and long-term rulesbased strategies. Our diverse suite of products helps traders and investors stay nimble in the short-term, and pursue strategies for the long-term as they navigate today s ever-changing markets. Direxion has offices in the U.S. and Hong Kong. See this: http://www.direxioninvestments.com How Leveraged Index Funds Are Different Although Direxion Leveraged Index Funds are somewhat similar to non-leveraged mutual funds, there are three key differences that are important for investors to understand: Leverage: Each dollar invested provides $2 of exposure to the performance of the fund s benchmark index, which means 200% (or 200% of the inverse) of the risk and volatility. Intra-month exposure levels: Movement of the benchmark index before purchase will increase or decrease the exposure levels for purchases made during the month with the exception of the last trading day of the month, when investors will receive true 200% (or 200% of the inverse) exposure. ly investment objectives: The funds seek to magnify the returns of their benchmarks on a monthly basis. Returns for periods longer than a calendar month are not equal to the cumulative return of the benchmark multiplied by the fund s target leverage point. They are the product of the series of leveraged monthly returns for the fund within the holding period. 2
Who Are ly Leveraged Index Funds Intended For? ly Leveraged Index Funds are not for everyone. These funds are intended for use by sophisticated investors as a small portion of a diversified portfolio. Direxion 2x ly Leveraged Index Funds may be right for those who: Understand the risks associated with the use of leverage; Understand the consequences of seeking monthly leveraged investment results; and Intend to actively monitor and manage their investments. These funds are not designed to be long-term, buy-and-hold 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 monthly investment results; and Are long-term investors who do not monitor their portfolios frequently. A Moving Target: How the Fund s to the Benchmark Can Vary If a Direxion 2x ly Leveraged Index Fund is purchased on the last day of the trading month, any investment made will receive the fund s target 200% (or 200% of the inverse) exposure from the time of purchase until the position is sold or until the next portfolio rebalance at the end of the following month (whichever event happens first). If a purchase is made on any day other than the last trading day of the month that is, intra-month the total exposure of the fund may be higher or lower than the stated monthly objective, depending on how much the target index has moved away from its value since the monthly rebalance. (This movement is the result of daily changes in the market.) After a move in the index that is favorable to the fund either on the upside for a bull fund, or on the downside for a bear fund total exposure will decline below the monthly stated objective (2x or -2x). Conversely, if the value of the index moves in a direction that is unfavorable to the fund either lower for a bull fund or higher for a bear fund total exposure will rise above the monthly stated objective. This occurs because, although the net asset levels of the fund and the total exposure to the index move directionally together, the percentage change in total net assets exceeds the percentage change in total exposure. During months when market fluctuation is minimal, the intra-month changes to exposure levels are minor. However, during months when there is substantial fluctuation in the value of the benchmark index, the intra-month changes to exposure levels may be greater. Direxion ly Leveraged Index Funds are intended to be used as short-term trading vehicles. 3
Bull and Bear Funds: Index Moves and Resulting Levels Bull Fund Intra- The table and graph below display the exposure levels obtained for a bull fund purchase, given various percentage changes in the underlying index. If an investor purchases a bull fund intra-month when the index has already increased 5%, that individual will receive nearly 191% exposure on their investment. 5% 190.91% Bull Funds -15% -10% -5% 0% 5% 10% 15% 242.86% 225.00% 211.11% 200.00% 190.91% 183.33% 176.92% Intra- Bull Fund Intra- - Bull Fund 300% 275% 250% 225% 200% 175% 150% -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% Index Move 105 4 100 95 96 94
Bear Fund Intra- The table and graph below display the exposure levels obtained for a bear fund purchase, given various percentage changes in the underlying index. If an investor purchases a bear fund intra-month, when the index has already decreased 5%, that individual will receive about -233% exposure on their investment. 5% -233.33% Bear Funds -15% -10% -5% 0% 5% 10% 15% -130.77% -150.00% -173.73% -200.00% -233.33% -275.00% -328.57% Intra- Bear Fund Intra- - Bear Fund -100% -150% -200% -250% -300% -350% -400% -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% Index Move 110 105 100 104 5 95
200% 175% ly Hypothetical $10,000 Scenarios 150% In order to illustrate the -25% effects -20% of purchasing -15% a Leveraged -10% Index -5% Fund at 0% increased 5% or decreased 10% exposure 15% 20% 25 levels, the following examples demonstrate what can happen to a Index $10,000 Move investment in ly 2x Bull and ly 2x Bear Funds. These examples do not take into account fund fees and expenses. SCENARIO #1: 105-100% 100 Intra- - Bear Fund 2x Bull Fund d at Increased Level The Fund, which had a closing 96-150% 95 NAV the previous month of 94 $100, decreases to $92 on the 92-200% 90 tenth business day, causing Index the Bull Fund exposure level to 85-250% 2x Bull Fund rise to 209%. The index level 88 80 moves from 96 to 94 during the -300% Start of holding period, a loss of 2.1%. The Bull Fund s NAV falls from Date of 10th Date of 30th $92 to $88 for the period, a loss -350% Index Value 96 Index Value 94 of 4.3%, which is 209% of the Bull NAV $92 Bull NAV $88 index move. -400% Level 209% Fund Return -4.3% % 20% 25% -25% -20% -15% -10% Index -5% Return 0% 5% -2.1% 10% 15% 115 Fund/Index Return 209% Index Move 112 112 Initial $10,000 at $9,565 e 94 88 End of SCENARIO #2: In light of a 4% gain in the index, the Bear Fund short exposure has increased to -226% by the tenth business day. The index level moves from 104 to, a gain of 1.9%. The Bear Fund s NAV declines from $92 to $88 for the period, a loss of 4.3%, which is -226% of the index gain. 109 110 103 105 100 100 97 Start of 95 90 85 80 Start of 108 2x Bear Fund d at Decreased Level 104 104 Index 2x Bull Fund 92 Index 2x Bear Fund 88 112 Bear NAV $92 120 Level -226% 115 Date of Index 2x Bear Fund 10th Index Value 104 110Initial 108 $10,000 Date of 30th Index Value Bear NAV $88 Fund Return -4.3% Index Return 1.9% Fund/Index Return -226% 112 at $9,565 le 6 105 100
-150% -200% -250% -300% 90 85 80 Start of Index 2x Bull Fund 92 88-350% % 20% 25% e 94 88 End of SCENARIO #3: -400% The Fund, which had a closing NAV the previous month of $100, increases to $104 on the tenth business day, causing the Bull Fund exposure level to decrease to 193%. The index level moves from 104 to during the holding period, a gain of 1.9%. The Bull Fund s NAV rises from $108 to $112 for the period, a gain of 3.7%, which is 193% of the index move. 2x Bull Fund d at Decreased Level -25% 115-20% -15% -10% -5% 0% 5% 10% 15% 112 112 Index Move 109 103 110 100 105 108 104 Index 104 2x Bull Fund 97 100 Start of 95 Date of 10th Date of 30th 90 92 Index Value 104 Index Value 88 85Bull NAV Index $108 Bull NAV $112 2x Bear Fund Level 193% Fund Return -3.7% 80 Index Return -1.9% Start of Fund/Index Return 193% Initial $10,000 at $10,370 le 112 End of SCENARIO #4: In light of a 4% loss in the index, the Bear Fund s short exposure has decreased to -178% by the tenth day. The index level moves from 96 to 94 during the holding period, a loss of 2.1%. The Bear Fund s NAV increases from $108 to $112 for the period, a gain of 3.7%, which is -178% of the index gain. 120 115 110 105 100 95 90 2x Bear Fund d at Increased Level Start of Index 2x Bear Fund Date of 108 96 112 10th Index Value 96 Bear NAV $108 Level 178% Initial $10,000 Date of 94 30th Index Value 94 Bull NAV $112 Fund Return -3.7% Index Return -2.1% Fund/Index Return -178% at $10,370 7
Managing Intra- Movements Index Moves in Favor of a 2x Bull Fund Before a Mid- In order to illustrate how the intra-month exposure level may be managed inside of an investment allocation, consider what happens when an investor wants to purchase of exposure to an index, using a ly 2x Leveraged Bull Fund. In this example, since the last fund rebalance, the S&P 500 Index has gained 5% a move that favors the Fund. Because the Fund will not rebalance again until the last trading day of the current month, the intramonth exposure level on this purchase date is now 191%. If the individual invests $10,000 in the fund at this point, she will only generate $19,100 worth of exposure. In order to obtain worth of exposure to the index, she would need to increase her investment amount by $471, for a total of $10,471. At the 191% exposure level, this investment amount will deliver the desired exposure amount of. How did we arrive at this amount? We know that the exposure level is 191% on the purchase date. So, we divided (the investor s desired exposure amount) by 191%. The result is about $10,471. (Direxion s Calculator could have made this calculation for the investor. See page 10 of this brochure for details.) INTRA-MONTH PURCHASES level varies with benchmark movements AT FUND'S PERIOD BEGINNING: 200% EXPOSURE LEVEL AFTER 5% INDEX VALUE INCREASE Estimated Level = 191% ADJUSTED INVESTMENT AMOUNT $10,000 $19,100 $10,000 Not Achieved Increased By $471 $10,471 Fund Assets Desired Obtained Index moves in favor of a bull fund before a mid-month investment /191% = $10,471 8 AFTER 5% INDEX VALUE DECREASE
Index Moves Against a 2x Bull Fund Before a Mid- AFTER 5% Given the same initial scenario as on INDEX page 6, VALUE let s look INCREASE at an investor who wishes to obtain worth of AT FUND'S PERIOD ADJUSTED exposure. In this case, however, the mid-month movement of the underlying index against the fund reduces BEGINNING: 200% the amount of principal required. Estimated INVESTMENT AMOUNT EXPOSURE LEVEL Level = 191% Since the last fund rebalance, the index had decreased by 5%, increasing the exposure level on purchases made at that point to 211%. $19,100 Not Achieved So, in this example, in order to maintain the worth of exposure to the index, a reduced principal Desired investment of $9,479 will be required. To arrive at this amount, once again, we divided (the investor s desired exposure amount) by 211%. The result is about $9,479. Obtained $10,000 $10,000 $10,471 Fund Assets Increased By $471 INTRA-MONTH PURCHASES level varies with benchmark movements AT FUND'S PERIOD BEGINNING: 200% EXPOSURE LEVEL AFTER 5% INDEX VALUE DECREASE Estimated Level = 211% ADJUSTED INVESTMENT AMOUNT $10,000 $21,100 $10,000 Excess Obtained Decreased By $521 $9,479 Fund Assets Desired Obtained 9
Intra- Management Tools No matter when an investor takes a position in any of Direxion s Leveraged Index Funds, Direxion makes it easy for them to determine the exposure level they can expect to receive. The Direxion website, www.direxioninvestments.com, provides easy-to-use, real-time tools in order to help investors learn about and manage intra-month exposure levels. Current Level Estimator levels for all of Direxion s Leveraged Index Funds are updated in real time, in the Tools section of our website. Using the Current Level Estimator tool, an investor can learn, on any given day, what the estimated current exposure level is for any of the Direxion ly Leveraged Index Funds. Direxion Calculators Direxion s Calculator can help investors determine how much money to invest in order to obtain a desired benchmark exposure level (expressed in dollar terms). Direxion s Calculator can help investors identify the total exposure (in terms of dollars) that a specified amount of principal will generate. 10
Summary of Important Considerations If an investor purchases shares of a Leveraged Index Fund on any trading day other than the last trading day of the calendar month, the level of exposure received will depend on the magnitude of the movement of the index since the last rebalance date. If the benchmark s intra-month movement is in favor of the fund, the level of exposure will be less than the fund s stated monthly exposure target. If the benchmark s intra-month movement is not in favor of the fund, the level of exposure will be greater than the fund s stated monthly exposure target. Once the investor has purchased a Leveraged Index Fund, the level of exposure on the date of purchase remains in effect until the earlier of: 1) the time he or she sells that position; or 2) the next portfolio rebalance on the last trading day of the current month. Investors can use Direxion s exposure calculator tools to manage their investments exposure levels. SUMMARY Direxion s ly Leveraged Index Funds are different from other leveraged funds because they allow users to pursue a tactical approach to investing, with less need for intra-month position adjustments. ly rebalancing funds allow for greater manageability of exposure levels throughout each month. This characteristic may reduce the frequency of monitoring necessary, relative to daily rebalancing funds although Direxion does recommend that investors actively monitor and manage their investments in any Leveraged Index Fund. For investors seeking to use leverage to execute short- to medium-term tactical investment maneuvers, Direxion s ly Leveraged Index Funds may provide a more manageable solution than Daily Leveraged Index Funds. Direxion encourages all potential investors to thoroughly read the prospectus to gain a full understanding of each fund s objectives and associated risks. For more information, please visit www.direxioninvestments.com or call 877.437.9363. 11
Disclosures An investor should consider the investment objectives, risks, charges, and expenses of Direxion Funds carefully before investing. The prospectus and summary prospectus contain this and other information about Direxion Funds. To obtain a prospectus, visit our website at www.direxioninvestments.com or contact Direxion at (877) 437-9363. The prospectus or summary prospectus should be read carefully before investing. The use of leverage by a fund increases the risk to the fund. The more a fund invests in leveraged instruments the more the leverage will magnify gains or losses on those investments. Leveraged Funds seek daily investment goals and are designed to be utilized only by sophisticated investors, such as traders and active investors employing dynamic strategies. Such investors are expected to monitor and manage their portfolios frequently. Investors should (a) understand the consequences of seeking daily investment results, (b) intend to actively monitor and manage their investment, and (c) understand the risk of shorting. 1.877.437.9363 info@direxioninvestments.com www.direxioninvestments.com Risks: An investment in the funds involves risk, including the possible loss of principal. s in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. by the funds in lower-rated and non-rated securities presents a greater risk of loss to principal and interest than higher-rated securities. The funds may invest in foreign securities which involve greater volatility and political, economic and currency risks and differences in accounting methods. The fund may include investments in derivatives that are subject to market risks that may cause their prices to fluctuate over time and may result in larger losses or smaller gains. Managed futures and commodities are subject to high volatility and may lose significant value in a short period of time. The funds may engage in active and frequent trading, leading to increased portfolio turnover and higher transaction costs. Additional risks are described in detail in the prospectus. Distributor: Rafferty Capital Markets, LLC. Date of First Use: February 25th, 2014