Thanks to the Fed’s easy money policy, solid earnings growth and improving global economic conditions, U.S. markets performed remarkably well in 2013. Apart from a few commodity and Single Country ETFs, most of the products saw decent returns for the time frame (Read: 5 Best Performing ETFs of the 5 Year Bull Run).
Expectations of similar returns from equity markets are tempting investors to remain invested in risky assets. Buoyed by rising investor interest, issuers have lined up various ETF products since the start of the year.
Most recently, UBS launched Exchange Traded Note (ETN) for leverage investors keen to gain from broader market return. The product ETRACS Monthly Reset 2x Leveraged S&P 500 Total Return ETN, launched on March 26, trades under the ticker symbol SPLX (Read: ProShares Rolls Out New Global Infrastructure ETF).
SPLX in Focus
The new leveraged ETN seeks to give investors exposure to the monthly compounded return of twice the performance (2x leveraged performance or 200%) of its benchmark. The benchmark- S&P 500 Total Return Index is one of the leading benchmarks for measuring the performance of large cap US equities.
Moreover, being a “total return index”, the performance of the above mentioned index reflects two components- the price performance of the Index constituents and the reinvestment of dividends on the Index constituents.
Sector-wise, the index seems to be somewhat concentrated in its top three sectors, Information Technology, Financials and Healthcare. Together, these constitute approximately half of the fund’s assets. The index appears to be light in Materials (3.6%), Utilities (2.9%) and Telecommunication (2.3%) in comparison.
Unlike the usual leveraged ETFs or ETN which reset daily, SPLX rests its leverage on a monthly basis. Thus there are only 12 resets per year for this product compared with approximately 252 reset events per year for leveraged securities with daily resetting leverage (Read: 3 Smart Beta ETFs to Beat the Market in 2014).
However, the fund charges 85 basis points as annual fees.
How will it fit in a portfolio?
The fund is a suitable option for investors willing to take leverage exposure to enjoy gains from trending bull markets, like the one we saw last year.
However, with the series of weak economic data since the start of the year, gradual ending of Fed’s massive stimulus program, geopolitical tensions between Russia and Ukraine and lingering concerns about a possible slowdown in the world’s second largest economy, China, it might be tough for U.S. markets to witness the same pace of rally this year as well.
Moreover, investors should keep in mind that though compounding can have both favorable and adverse effects on the return, in times of volatility the effects are usually negative.
Though there are quite a number of leveraged equities, the fund is likely to face stiff competition from the largest player in leveraged space - ProShares Ultra S&P500 ((SSO - ETF report)). Launched in June 2006, the fund seeks to deliver twice the daily exposure of the S&P 500 Index. The product manages an asset base of $3.1 billion and charges 95 basis points as fees.
Also, UltraPro S&P 500 ((UPRO - ETF report)) and Direxion Daily S&P 500 Bull 3x Shares ((SPXL - ETF report)) both of which provide three times (300%) the daily exposure of the performance of S&P 500 pose stiff competition for the fund. Both the funds charge the same fees as SSO (see all the Leveraged Equities ETFs here).
The newly launched fund’s feature of resetting its holdings on a monthly basis is what makes it different from the rest. By resetting its leverage on a monthly basis, the fund is expected to meet its objective (2x returns of the index) amid a choppy market. Moreover, monthly resetting also makes SPLX a little cheaper than the above mentioned ETFs.
However, the product may not reap the benefits of daily compounding of returns during a trending bull market compared with its above mentioned competitors who rebalance their holdings daily.
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