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For internal use only Sylvia Jablonski SVP, Product Strategy DirexionShares Speaker: Rules of Engagement for Leveraged ETFs

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  • 1. Rules of Engagement forLeveraged ETFsSpeaker: Sylvia Jablonski SVP, Product Strategy DirexionSharesFor internal use only

2. Important DisclosureDirexion is not affiliated with or employed by Charles Schwab & Co. Inc, and theirpresentation should not be construed as a recommendation or endorsement by Schwab. Youmust decide about the appropriateness of their products and services for you. Schwab doesnot supervise third-party firms and takes no responsibility to monitor the products or servicesthey provide to you.The views expressed are for general information purposes only and are not intended toprovide specific financial, accounting or legal advice. Schwab makes no representation aboutthe accuracy of the information or its appropriateness for any given situation.The information and opinions contained in this presentation have been obtained fromsources believed to be reliable, but no representation or warranty, express or implied, ismade that such information is accurate or complete and it should not be relied upon as such.This presentation does not purport to make any recommendation or provide investmentadvice to the effect that any inverse or leveraged ETF is appropriate for all investmentobjectives, financial situations or particular needs. Prior to making any investment decisions,investors should seek advice from their advisers on whether any part of this presentation isappropriate to their specific circumstances. This presentation is not, and should not beconstrued as, an offer or solicitation to buy or sell any products. Expressions of opinion arethose of Direxion only and are subject to change without notice.2 For internal use only 3. Important Disclosure, cont. An investor should consider the investment objectives, risks, charges, and expenses ofDirexion Shares carefully before investing. The prospectus and summary prospectus containsthis and other information about Direxion Shares. To obtain a prospectus or summaryprospectus, please visit www.direxionshares.com. The prospectus should be read carefullybefore investing.There is no guarantee of success with any technique, strategy or investment.The VIX (ticker symbol for the Chicago Board Options Exchange Volatility Index) is an indexdesigned to track market volatility as an independent entity. The S&P 500 Index is a broad-based unmanaged measurement of changes in stock market conditions based on 500 widelyheld common stocks. One cannot invest in an index.The views in this presentation are intended to assist the audience in understanding the Fundsinvestment methodology and do not constitute investment advice, nor is it a recommendation tobuy or sell securities. 3 For internal use only 4. What were covering today> Daily Investment Objectives Tactical Trading Tools> Leverage How It Affects Risk and Return> Compounding When Does It Matter?> How Can They Be Appropriately Used?> Myths> Risks: Counterparty> The Bottom Line 4For internal use only 5. Who uses Inverse and Leveraged ETFs?Inverse and Leveraged ETFs are designed for sophisticated investors who:>Understand the risks associated with the use of leverage>Understand the consequences of seeking daily leveraged investment results>Intend to actively monitor and manage their investmentsThese 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 daily investment results>Are long term investors who do not monitor their portfolios frequentlyThe risks associated with the funds are detailed in the prospectuses and summary prospectus, which include: adverse market condition risk, advisers investmentstrategy risk, aggressive investment techniques risk, concentration risk, counterparty risk, credit and lower-quality debt securities risk, equity securities risk, currencyexchange risk, daily correlation risk, daily rebalancing and market volatility risk, depository receipt risk, foreign and emerging markets securities risk, sector securities risk,interest rate risk, inverse correlation risk, leverage risk, market risk, non-diversification risk, shorting risk, small and mid cap company risk, tracking error risk, and specialrisks of exchange-traded funds, market timing activity and high portfolio turnover risk, investing in other investment companies and ETFs risk, commodities securities risk,geographic concentration risk, valuation time risk, derivatives risk, commodity-linked derivatives risk, wholly-owned subsidiary risk, tax risk, options and futures contractsrisks, security selection risk, Debt Instrument Risk, Gain Limitation Risk, Leverage U.S. Government Securities Risk, and Special Risks of Exchange-Traded Funds.ETFs are bought and sold directly by shareholders in a primary market and trade throughout the day on an exchange. ETFs are bought and sold at market price (notNAV) and are not individually redeemed from the fund. Brokerage commissions will reduce the returns. Market price returns are based upon the midpoint of the bid/askspread at 4:00 pm Eastern time (when the NAV is normally determined) and also do not represent the returns you would receive if you traded shares at other times.Investing the funds may be more volatile than investing in broadly diversified funds. The use of leverage by a fund means the Funds are riskier than alternatives which donot use leverage. Aggressive investing would include the use of futures, enhanced betas, and shorting securities. Shorting securities occurs when investors sell securitiesthey dont own and are committed to repurchasing eventually. Alpha is a measure of performance on a a risk-adjusted basis. The excess return of the fund relative to thereturn of the benchmark index is a funds alpha. Futures are financial contracts obligating the buyer to purchase an asset such as a physical commodity or a financialinstrument, at a predetermined future date and price. Swaps are the exchange of one type of asset, cash flow, investment, liability or payment for another. 5Distributor: Foreside Fund Services, LLC For internal use only 6. Leverage: The Basics> Leveraged ETFs are a combination of equity baskets and derivatives typically swaps or futures contracts.> This allows investors to gain exposure to specific indexes and sectorswithout the need for full dollar-for-dollar investment. Typical Composition of a 2x ETFStrategy EquitiesDerivativesBull Funds80%-100% 100%- 120%Bear Funds (inverse) 0%200% Typical Composition of a 3x ETFStrategy EquitiesDerivativesBull Funds80%-100% 200%- 220%Bear Funds (inverse) 0%300%6 For internal use only 7. Daily Investment Objectives:3x Bull Fund when the underlying index risesWhen the underlying index rises, fund assets rise. The fund must increase its exposure to theindex so the total is once again equal to 300% of the funds new level of net assets.Hypothetical ExampleIndex Rises 1%(in millions)* These performance numbers do not reflect daily operating expenses and financing charges, are hypothetical in nature, and are not representative ofactual Direxion Shares returns. There is no guarantee the funds will achieve their objective.7For internal use only 8. Leverage: Risk and Return3x Bull Fund when underlying index risesThe incremental return of the investment in this scenario would be $1,500, which is 3x the daily increase in theindex (15%) multiplied by the amount of the total initial investment. These performance numbers do not reflect daily operating expenses and financing charges, are hypothetical in nature, and are not representative of actual Direxion Shares returns. There is no guarantee the funds will achieve their objective. For internal use only 9. Daily Investment Objectives:3x Bull Fund when the underlying index declinesWhen the underlying index declines, fund assets decline. The fund must reduce its exposure tothe index so the total is once again equal to 300% of the funds new level of net assets.Hypothetical ExampleIndex Falls 1%(in millions)* These performance numbers do not reflect daily operating expenses and financing charges, are hypothetical in nature, and are not representative ofactual Direxion Shares returns. There is no guarantee the funds will achieve their objective.9For internal use only 10. Leverage: Risk and Return3x Bull Fund when underlying index declinesThe loss on the investment in this scenario would be $1,500 which is 3x the daily decrease in the index (-15%)multiplied by the amount of the total initial investment.These performance numbers do not reflect daily operating expenses and financing charges,are hypothetical in nature, and are not representative of actual Direxion Shares returns. Thereis no guarantee the funds will achieve their objective.For internal use only 11. The Risks of CompoundingExample: Market Rises SteadilyThe funds gains may be larger than expected.*These numbers do not reflect daily operating expenses and financing charges, are hypothetical in nature, and are not representative of any specific funds returns. There is no guarantee the funds will achieve their objective. 11For internal use only 12. The Risks of CompoundingExample: Market Declines SteadilyThe funds loss may be less than expected.*These numbers do not reflect daily operating expenses and financing charges, are hypothetical in nature, and are not representative of any specific funds returns. There is no guarantee the funds will achieve their objective. 12For internal use only 13. The Risks of CompoundingExample: Market is Flat, Yet VolatileIn volatile markets, the pursuit of daily investment targets will have a negative impact on theETFs performance for periods longer than a single day.*These numbers do not reflect daily operating expenses and financing charges, are hypothetical in nature, and are not representative of any specific funds returns. There is no guarantee the funds will achieve their objective. 13For internal use only 14. Compounding: Volatility MattersMore is not always betterHypothetical Index experiences higher volatility.3.84%-19.99% Volatility Hypothetical Index Hypothetical 3x ETFTime / Trading Days Hypothetical 3x ETFHypothetical Index Hypothetical 3x ETF Hypothetical 3x ETFInformation presented here is hypothetical and meant for illustrative purposes only. For internal use only 15. Compounding: Volatility Matters Less is sometimes more The same index experience much less volatility than in the previous example.100%120.0% Index Return = 28.50%90% 100.0% 3x Index Return =85.50%80% 80.0%Bull Fund Return = 91.68%70% 60.0%Difference =6.18%60% 40.0% -3x Index Return = -85.50%50% 20.0%Bear Fund Return = -56.63%40%0.0%Difference = 28.87%30% -20.0%Volatility20% -40.0%Hypothetical Index10% -60.0%Average Volatility: 20% Hypothetical 3x ETF 0% -80.0%Hypothetical 3x ETFDay 1Day 2 Day 3Day 4 Day 5 Day 6Day 7Day 8 Day 9 Warning! Greater than expected returns are nice, but compounded returns increase (for a bull fund) your exposure levels beyond 3x, making your position more sensitive to future market movements.15 Information presented here is hypothetical and meant for illustrative purposes only.For internal use only 16. How Are Leveraged & InverseETFs Appropriately Used?Opportunistic Trading> Partial Leveraging> Hedging> Portable Alpha16For internal use only 17. Partial Leveraging: Gold MinersDivergence Between Gold Miners Index vs. GoldValue/Price in DollarsSpread in Dollars % Spread Between Gold Miners and Spot GoldSource: Bloomberg.Past Performance is not indicative of future results. 17For internal use only 18. Hedging: Fixed Income Exposure > Short 3x ETFs can provide greater hedging efficiency. > Scenario: There is an FOMC (Federal Open Market Committee) announcement today. You are unsure if there will be a rate cut or hike. A significant portion of your portfolio is allocated to Long Term Fixed Income. Consider the following example:1. Determine hedge2. Allocate to a 3x Leveraged 30 Year Treasury ETF$1 invested = $3 of negative exposure3. After rate decision, choose to leave or remove hedge 18There is no guarantee of success with any technique, strategy or investment. For internal use only 19. Portable Alpha: Developed and EmergingMarketsVolumes spike as investors seek protection and opportunity inbear funds Leveraged Emerging Shares TradedLeveraged Developed Shares Traded16,000,000 2,500,00014,000,000 2,000,00012,000,00010,000,000 1,500,000 8,000,000 6,000,000 1,000,000 4,000,000 500,000 2,000,0000 02/ 0 11 31 1 31 14/ 0 11 31 16/ 0 11 31 19/ 0 1111/ 010 11 2/ 0 1130 131 131 130 1 131 130 131 131 0 1101010101 10 0 10101010101010110 0 1 120 20 20 /2 /2 /2 /2 /2 /2 /2 /2 /22/2/2/2/2/2/2/2/2/21/1/ 31 28 30 30 30 1/ 1/28/3/3 /3 /33/5/7/8/ 12 1/ 3/ 6/ 8/ 9/ 4/ 5/ 7/12 19 For internal use only 20. Myths about Leveraged & InverseETFs They Exacerbate Market Volatility, Myth 1: Especially At The Close Bear Funds Exacerbate Market Myth 2: Declines20 For internal use only 21. Myth 1: Exacerbating Market VolatilityMyth:> End-of-day trading by Leveraged ETFs impacts volatilityReality:> Leveraged and leveraged inverse ETFs transact at (or near) the close: buying onup days if net long; selling on down days if net long.> Total net long and short exposure trading at end of the day is smaller than thesum of the bear and bull parts.> Market Volatility has been higher at the opening than it has been at the close.Arbitrage is the simultaneous purchase and sale of an asset in order to profit from a difference in the price. It is a trade that profits by exploiting pricedifferences of identical or similar financial instruments, on different markets or in different forms. Arbitrage exists as a result of market inefficiencies; itprovides a mechanism to ensure prices do not deviate substantially from fair value for long periods of time. 21For internal use only 22. Volatility at the open is higher than it is at the closeLeveraged ETFs do not rebalance at the openFive minute volatility High Volume NYSE Issues (basis points) 140 120 Aug-11 Aug-10 100 Aug-09 Aug-08Basis Points 80 Aug-07 Aug-06 60 40 20 0% 9:35 10:05 10.35 11:05 11.35 12:05 12.35 13:05 13.35 14:05 14.35 15:05 15.35 16.05Past performance is not indicative of future results. Leveraged ETFs are not market participants in the first half hour of trading, yet volatility is veryoften at its highest level of the day. Therefore there must be other events that are affecting volatility much more than trading by leveraged ETFs.22Top 100 issues: top 100 trading securities. Basis Point is a unit that is equal to 1/100 of 1%, and is used to denote the change in a financialinstrument (i.e. 1% change = 100 basis points, and 0.01% = 1 basis point). For internal use only 23. Myth 2: Intensifying Market DeclinesMyth:> Leveraged ETFs are creating net short positions in financials> Bear funds create large short exposuresReality:> Leveraged ETFs were net long financials through the most volatile markets> Short exposure positions of bear ETFs represent only a small fraction of overallshort exposure. 23For internal use only 24. Risks: Counterparty (CP) ExposureIs Counterparty Exposure a Risk?> YesWhat do you do to mitigate that risk?> Constant credit analysis of counterparties> Diversification of swap exposure to 6 different counterparties> Tri-party Collateral Management:> Segregated Account held at Custodian for benefit of thecounterparty> Daily Margin Management> Effectively reduces counterparty exposure to 1 day mark tomarket risk. 24For internal use only 25. The Bottom Line> Monitor and Act When Necessary> Not meant to be held, unmonitored for long periods> Volatile Periodsmay need to adjust more frequently> Less Volatile Periodsstill need to monitor frequently> Dont have the resources, time or inclination? Dont use them. 25 For internal use only 26. 26 2009 DirexionsharesFor internal use only 27. 27 2009 DirexionsharesFor internal use only 28. 28 2009 DirexionsharesFor internal use only 29. 29 2009 DirexionsharesFor internal use only 30. 30 2009 DirexionsharesFor internal use only