Direxion Electric and Autonomous Vehicles
ETF:
5) The description of the Indxx US Electric and Autonomous Vehicles Index (“Indxx Index”) in its fact sheet differs from what is disclosed in the Fund’s prospectus. Please explain or revise the description of the Index in the prospectus to align with the fact sheet.
Registrant respectfully declines to revise the description of the Indxx Index
in the prospectus to align with the Indxx’s Index fact sheet. Registrant drafted such disclosure to improve investor understanding, to align with SEC staff positions, and
to respond to SEC staff comments on the registration statement for another series of the Registrant, the Direxion Daily Electric and Autonomous Vehicles Bull 2X Shares (EVAV), which seeks daily investment results, before fees and expenses, of 200% of the performance
of the Indxx Index.
6) Please supplementally state whether Indxx is a sponsor of or affiliated with the Fund.
Registrant confirms that Indxx is not a sponsor of, and is not affiliated with the
Fund.
7) The prospectus states that “In
cases when there are less than 25 eligible companies, the Index will include companies that derive less than 50% but greater than or equal to 20% of their
revenue from the activities associated with the sub-themes until 25 companies are selected.” This statement appears to be inconsistent with Rule 35d-1,
which requires a company to obtain at least 50% of its revenue from a named business activity to be counted for purposes of a fund’s 80%
test.
Registrant respectfully notes that there is no such
requirement in Rule 35d-1 for a company to obtain at least 50% of its revenue from a named business activity to be counted for purposes of a fund’s 80% test. Registrant
acknowledges that the “50% of revenues or profits” test comes from the Certain Countries or Geographic Regions portion of the Names Rule (i.e., Rule 35d-1(a)(3))
and that the Adopting Release to Rule 35d-1 endorses that test for determining whether a fund’s assets are tied to the economic fortunes and risks of a country or geographic region. Because the Fund’s name does not include the names of countries or geographic regions, this test is inapplicable.
Registrant further notes the 80% requirement cannot be extrapolated to terms such as “electric and autonomous vehicles” by simply declaring electric and autonomous vehicles securities to be an asset class, like equity and fixed income securities. Nor can the 80% requirement, inclusive of the 50% revenue or profits test, be applied to the term " electric and autonomous
vehicles " by simply declaring electric and autonomous vehicles securities to be a type of investment. Assuming that “electric and autonomous vehicles” are a type of investment, consider Question 6 in the Staff’s Frequently Asked Questions regarding Rule 35d-1. FAQ #6 provides as follows:
Q: Does rule 35d-1 apply to funds that use the terms "small-cap," "mid-cap," and "large-cap?"
A: Yes. Terms such as "small-, mid-, or large-capitalization" suggest a
focus on a particular type of investment, and investment companies that use these terms will be subject to the 80% investment requirement of the rule. As a general matter, an investment company may use any reasonable definition of
these terms and should define these terms in its discussion of its investment objectives and strategies in its prospectus. In developing a definition
of the terms "small-, mid-, or large-capitalization," registrants should consider all pertinent references, including, for example, industry indices, classifications used by mutual fund rating organizations, and definitions used in
financial publications. Definitions and disclosure inconsistent with common usage, including definitions relying solely on average capitalization, are considered inappropriate by the Staff. (Emphasis added.)
Registrant notes FAQ #6 allows registrants largely to “use
any reasonable definition” of investment types; and here, the Trust proposes a reasonable definition of electric and autonomous vehicles companies as set forth in the
“Principal Investment Strategy” section. The Trust employs this definition because the index that the Fund seeks to track employs this definition.
Additionally, Registrant believes the Indxx Index’s definition of electric and autonomous vehicles companies support the inclusion of “Electric and Autonomous Vehicles” in the Fund’s name. Among other reasons, the Indxx Index is clearly designed and will whenever possible include 25 constituents, all of which will derive at least 50% of their revenue from the sub-themes described. While the index methodology includes rules for compiling the Index when 25 companies do not exist, the clear intent of the
Index is to include 25 electric and autonomous vehicles companies. Further, based on the Trust's review of current index constituents, the index appears to include companies whose fortunes are firmly tied to the success of the electric and autonomous vehicles industry. Based on such due diligence, the Trust believes among other considerations, the Fund’s name is consistent with the requirements of Rule 35d-1 and the related FAQs, and is not misleading.
8) Please revise the 80% test to require the Fund to invest
at least 80% of its net assets in electric and autonomous vehicles, or revise the Fund’s name to add the word “Index”.
The Fund has adopted a policy to invest, under normal circumstances, at least 80% of its net assets (plus borrowing for investment purposes) in the securities that comprise the Index or investments with economic characteristics similar to the securities included in the Index. Because the Indxx Index is comprised of electric and autonomous vehicles companies, then the Fund will inherently be invest 80% in electric and autonomous vehicles companies. Therefore, Registrant respectfully declines to revise the Fund’s name.
9) Please supplementally confirm the inclusion of “Small- and/or Mid-Capitalization Company Risk” in light of the fact that securities in the Index must have a minimum market capitalization of $500 million, which may generally be considered mid-cap (and not small-cap) securities.