ProShares, the world’s biggest purveyor of leveraged and inverse funds, today rolled out a double-exposure bull-and-bear pair of ETFs focused on the Australian dollar, a “commodity currency” whose fortunes have been closely tied to rising demand for raw materials from the developing world.
The double-long ProShares Ultra Australian Dollar ETF (NYSEArca: GDAY) and the double-short ProShares UltraShort Australian Dollar ETF (NYSEArca: CROC) are commodity pools that employ currency futures to achieve their objective. Both have annual expense ratios of 0.95 percent—the cost of most ProShares products. Their performance is benchmarked to the U.S. dollar price of the Aussie dollar.
Catchy tickers aside, the closest competitor to the new ProShares funds is the CurrencyShares Australian Dollar Trust (NYSEArca: FXA), a grantor trust that owns actual Australia dollars and has an expense ratio of 0.40 percent. But that comparison may be a bit of a stretch, as the ProShares products, given how their leveraging mechanisms work, aren’t really designed to be held over the long term.
In any case, the Australian dollar has benefited from the rise of China, as Australia’s troves of raw materials have been in high demand. Contrary to much of the developed world, its economy is relatively robust, a state of affairs made clear by its official interest rates, which are above 3 percent. By comparison, official short-term interest rates in the U.S. have been at about nil since the crash of 2008.
Australia’s economy has also been very much tied into the “risk-on/risk-off” pattern of trading in financial markets over the past several years, especially in the years since the crash. That has made Australia’s currency volatile at times, as investors shift money into and out of riskier assets depending on what’s going on in, say, fiscally strapped Europe.
To the extent that such moves in the Aussie dollar are “tradable,” the ProShares products could be seen as suitable tools to benefit from such swings. That’s because, as noted, the ProShares products are most appropriate for short-term holding periods, as they are rebalanced daily.
What that means in practice is that the returns of such funds can diverge significantly from those of their respective indexes, particularly in volatile and trendless markets.
But as short-term products, the ProShares funds are poised to take advantage of their tax treatment. All futures-related investments are taxed at a blended rate of 60 percent long-term capital gains and 40 percent short-term capital gains. That yields an overall rate of 23 percent—less than the ordinary rate that prevails for most products over the short term.
In the prospectus describing the funds, Bethesda, Md.-based ProShares warned that leveraged products have particular characteristics that make them more suitable to vigilant investors who watch their holdings closely.
“Shareholders who invest in the Funds should actively manage and monitor their investments, as frequently as daily,” the prospectus said.
Real-world tracking difference is incredibly important. So why does nobody look at it?
Today’s headlines on these quant/active strategies have us scratching our heads.
Nobody’s an average Joe when it comes to taxes.
With so much focus on new tech, is there a hidden play in ETFs?