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About two years ago, a friend introduced me to Scott Acheychek, president of REX Shares. REX creates unique ETPs that traders may find compelling, such as its MicroSectors line of ETPs.
I was invited by Scott to attend the opening bell ceremony on the floor of the NYSE on Monday, June 10. It was a great event, with brief footage here from the NYSE website.
Afterwards, I did an interview with Scott about MicroSectors and the FANG+ suite of products offered by REX.
Tell readers about REX Shares, Scott.
Sure thing. REX is an Exchange Traded Product architect founded by Greg King. We are structurers and traders at heart who constantly survey the market to see if there are opportunities to create new or what we feel are better access products. We created the MicroSectors brand as a solution for all of those sophisticated investors and traders that are looking for a more targeted exposure than what the ETP world currently provides.
Some associate the FANG stocks as examples of best-in-show companies with stock performances to match, while others view this collection as a repeat of dot.com madness and overvaluation. Can you tell readers about the FANG+ Index?
The FANG+ index is developed by ICE/NYSE. This index provides access to a select group of highly-traded growth stocks of next-generation technology companies. When people think tech, they largely think about these names. There are presently only 10 components, and rather than let a few of the bigger names dominate the basket via market cap weighting, the index is rebalanced to equal weight on a quarterly basis.
Rexshares.com
How is trading FANG products different from just trading the QQQs or perhaps the XLK?
Great question. We look at indices, not the wrappers, and break them down all the time. Many traders are surprised when you tell them some of the top holdings of the Nasdaq 100 (NDX) and the Technology Select Sector Index because they don’t realize NDX is just the largest 100 non-financial stocks listed on the Nasdaq Exchange; similarly, the Tech Select Index includes IT Consulting companies.
What that means is NDX has names like Pepsi (NASDAQ:PEP), Costco (NASDAQ:COST), and Starbucks (NASDAQ:SBUX) in its top 20 holdings, and the Tech Select Sector Index has names like Visa (NYSE:V) and Mastercard (NYSE:MA) in its top 5 holdings because those companies are categorized as IT Services!
Be honest Adam, do you think about Visa or Pepsi when you think about trading Tech?
No, those names don’t exactly spring to mind.
Exactly. Take a look at these three pie charts. This breaks down the Bloomberg classification of all of the holdings within the FANG+ Index, the Nasdaq-100 Index, and the Technology Select Sector Index.
When REX is looking to introduce a new product to market, what does it look for in an index?
Our entire goal with MicroSectors is to provide a more targeted or precise exposure to popular areas of the market like tech or big banks. We want to create indices that allow people to better express their trading views than what is currently in the market. Our products contain the stocks people know in the sectors they follow.
Targeted ETPs give traders access to features such as leverage and thematic exposure, without unwanted industries such as, say, food and beverage or IT. Again, do people really want Pepsi or Visa exposure in their technology trade? I don’t believe they do.
Beyond that, while market-cap weighting may hold some benefits for long-term investors, we think it tends to not work so well for the purposes of trading. We look for equal-weighting indexes that approximate diversified positions that we believe traders would find desirable.
You mentioned that the NYSE FANG+ index is based on equal weighting. How often does ICE rebalance? Will the index always be composed of the same 10 companies? Correct, the NYSE FANG+ index is equal weighted. It rebalances to those equal weights on a quarterly basis. The team at ICE (NYSE parent company) has the ability to make changes to the basket, as reviewing the index composition is also done on a quarterly basis. The index specifies that there will always be a minimum of 10 companies.
Excerpt from NYSE FANG+ Index Methodology
Can you fill traders in on the MicroSectors FANG+ product suite?
We offer a variety of exposures to FANG+. We’d love for people to agree that if they trade Tech, they want to use FANG+. So to be as flexible as possible for investors and traders, we offer a variety of products featuring different exposures. On the long side we have FNGU (3x), FNGO (2x) and on the inverse side, we have GNAF (-1x, FANG spelled backwards), FNGZ (-2x), and FNGD (3x). Each of the leverage and inverse products reset on a daily basis.
REXshares.com
Let’s talk about leverage on these products. What is the biggest misconception that you have heard or read about as it relates to this topic?
The most common misconception that I come across is that leverage is based on an individual’s holding period. Many leverage products reset on a daily basis. If you hold a daily-resetting product for 10 days, your performance is based on those daily price moves. It is not based on your individual holding time period, so if the index is up 10% after a month, a 3x daily resetting product may not show exactly a 30% return; in fact it almost certainly won’t.
Returns over time are based on compounded daily leveraged returns. This makes the products’ momentum instruments, traders commonly refer to the trend being your friend with these types of products, meaning that they tend to do well on sustained moves, while giving up ground during periods of chop.
Thanks for taking the time to discuss these new products with investors, Scott. I look forward to hearing more from REX Shares, and I think it’s great that you are focusing on ETPs that give traders ready access to the names they want to trade.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.
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