As per Boost ETP, AUM of global leverage/inverse products was a record $70 billion at the end of September, up 14% since the start of the year. About 72% of AUM comes from leverage/inverse equity ETPs, 12% from debt, 9% from commodities and the rest from currency and alternative ETPs (read: 10-Minute Guide to 10 Most Popular Leveraged ETFs).
These products either create a leveraged long/short position, an inverse long/short position or a leveraged inverse long/short position in the underlying index through the use of swaps, options, future contracts and other financial instruments. Due to their compounding effect, investors can enjoy higher returns in a very short period of time provided the trend remains a friend.
However, these funds run the risk of huge losses compared to traditional funds in fluctuating or seesawing markets. Further, their performances could vary significantly from the actual performance of their underlying index over a longer period when compared to a shorter period (such as, weeks or months).
Still, we have highlighted five leverage/inverse products that have been crushing the market from the year-to-date look albeit with greater volatility. This trend might continue at least for the near term if the global sentiments remain volatile (read: 10 Most Heavily Traded Leveraged ETFs YTD).
ProShares UltraShort MSCI Brazil Capped ETF (BZQ) – Up 68.5%
This fund seeks to deliver twice (2x or 200%) the inverse (or opposite) performance of the MSCI Brazil 25/50 Index. The benchmark is a market capitalization weighted index designed to measure the equity market performance of the Brazilian market. The product has amassed $24.9 million in its asset base while charging 95 bps in fees and expenses. It trades in moderate volume of about 40,000 shares a day.
iPath Short Enhanced MSCI Emerging Markets Index ETN (EMSA) – Up 45.3%
This product offers twice the inverse performance of the MSCI Emerging Markets Index, which provides exposure to the 21 emerging market countries: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey. The note is unpopular and illiquid with AUM of just $1.9 million and average daily volume of about 100 shares. Expense ratio came in at 0.80%.
PowerShares DB Base Metals Double Short ETN (BOM) – Up 34.1%
This ETN provides twice the inverse exposure to the daily performance of the Deutsche Bank Liquid Commodity index – Optimum Yield Industrial Metals Excess Return – which seeks to measure the performance of underlying futures contracts on aluminum, copper and zinc. In particular, aluminum accounts for 36.2% share, closely followed by copper (35.2%) and zinc (28.6%). It has paltry AUM of $2.8 million and sees volume of less than 2,000 shares a day on average. The product charges 0.75% in expense ratio (see: all the Inverse Commodity ETFs here).
PowerShares DB Commodity Double Short ETN (DEE) – Up 29.6%
This note also allows investors to go short on commodities with a two times leveraged factor with the same expense ratio. Unlike BOM, this product tracks the performance of the Deutsche Bank Liquid Commodity Index, which consists of underlying futures contracts on six commodities: wheat, corn, light sweet crude oil, heating oil, gold and aluminum. Energy accounts for about 60% of the portfolio while agricultural, industrial metals and precious metals make up for 20%, 12% and 9%, respectively. It has AUM of $2.3 million and average daily volume of about 200 shares.
Direxion Daily Retail Bull 3x Shares (RETL) – Up 28.1%
This fund seeks to deliver thrice (3x or 300%) the performance of the Russell 1000 Retail Index, which consists of companies that sell to consumers discretionary products supplied by manufacturers. These include specialty retailers as well as diversified retailers such as department stores, discount stores, and superstores. It trades in volume of 42,000 shares a day and charges 95 bps in annual fees. RETL is the sole ETF in the retail space offering a leveraged exposure.
ProShares UltraShort Bloomberg Commodity (CMD) – Up 26.3%
This product also offers two times inverse exposure to the commodities market but tracks the Bloomberg Commodity Index, which is currently composed of futures contracts on 19 physical commodities. This results in the largest allocation of 36% to the agricultural commodity market, followed by energy (33%), industrial metal (20%) and precious metal (11%). The fund is relatively popular than many leveraged inverse commodity ETFs as depicted by its AUM of $6.6 million. It trades in volume of about 400 shares a day on average and charges 95 bps in annual fees.
ProShares UltraShort Bloomberg Natural Gas ETF (KOLD) – Up 24.5%
This fund provides two times inverse exposure to the daily performance of the Bloomberg Natural Gas Subindex, which seeks to reflect the natural gas segment of the commodities market through futures contracts. KOLD has managed assets of $12.1 million and sees lower average daily volume of under 28,000 shares. Expense ratio came in at 0.95% (read: More Pain Ahead for Natural Gas? 2 Bear ETFs to Play).
ETRACS 1xMonthly Short Alerian MLP Infrastructure Index ETN (MLPS) – Up 17.2%
This note provides short exposure to the master limited partnership (MLP) corner of the U.S. energy segment. It tracks the inverse performance of Alerian MLP Infrastructure Total Return Index plus return on a T-bill. The note failed to garner enough investor interest with AUM of just $5.2 million and sees paltry volume of around 7,000 shares a day. MLPS charges 85 bps in annual fees and expenses.
PowerShares DB Crude Oil Double Short ETN (DTO) – Up 17.0%
This ETN provides twice the inverse exposure to the Deutsche Bank Liquid Commodity Index-Light Crude, which tracks the performance of a basket of WTI oil futures contracts. It has amassed $48.3 million in its asset base and trades in a moderate daily volume of roughly 90,000 shares. The product charges 75 bps in fees per year from investors (read: Still Believe in Goldman's $20 Oil? Go Short With These ETFs).
ProShares UltraShort Basic Materials ETF (SMN) – Up 16.3%
This fund seeks two times inverse exposure to the Dow Jones U.S. Basic Materials Index, charging 95 bps in fees. The benchmark measures the performance of the companies involved in the production of aluminum, steel, non-ferrous metals, commodity chemicals, specialty chemicals, forest products, paper products, as well as the mining of precious metals and coal. The ETF has amassed $23.9 million in its asset base and trades in moderate volume of more than 25,000 shares per day on average.
Bottom Line
As a caveat, investors should note that these products are suitable only for short-term traders as these are rebalanced on a daily basis. Further, liquidity can be the biggest problem for these products that could make them more expensive than they appear.
Still, ETF investors seeking to tap abrupt movements can go long or short in the near term.
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PRO-ULS MSCI BR (BZQ): ETF Research Reports
IPATH-SE M EM I (EMSA): ETF Research Reports
DB BM DS (BOM): ETF Research Reports
DB CM 2XS (DEE): ETF Research Reports
PRO-ULS BB CMDT (CMD): ETF Research Reports
DIR-D RTL BL 3X (RETL): ETF Research Reports
PRO-ULS BB NG (KOLD): ETF Research Reports
UBS-AG 1XM SAMI (MLPS): ETF Research Reports
DB CO DS (DTO): ETF Research Reports
PRO-ULS BAS MAT (SMN): ETF Research Reports
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