Sometimes ‘extended’ or ‘enhanced’ actually means ‘leveraged.’
Three funds stood out to me when I scanned lists of top performers in a recent Wall Street Journal article. The lists, titled “Category Kings in 22 Realms” and published on Monday, named the mutual funds and ETFs with the best 12-month performance at the end of the third quarter.
Standing atop two key lists were three ETFs that had no business being there. Leading the pack for 12-month performance among “Large Cap Core” funds was the iPath Long Extended S&P 500 TR ETN (SFLA).
Why doesn’t this fund belong on this list? It’s leveraged. Not that you could tell from the name, which is apparently what fooled the good folks at the Journal, or their data provider, Lipper.
I’m sure this is an error, albeit an understandable one. Leveraged exchange-traded funds are typically excluded from size, style or sector performance lists simply because their magnified returns will typically rise to the top in upmarkets (or sink to the bottom in downmarkets), displacing the results of unlevered competitors.
SFLA’s naming is sloppy in my view. The only clue toward the fund’s leverage is the word “extended.” That’s an unfortunate adjective since: a) it’s not commonly used to mean “leveraged”; and b) it typically refers to something completely unrelated: the combination of small-cap and midcap markets, as in the Vanguard Extended Market ETF (VXF | A-85).
Likely for the same reason, SFLA’s sister fund made it to the top of the “Large-Cap Growth” list. The iPath Long Extended Russell 1000 TR ETN (ROLA) is also leveraged, which should exclude it. I don’t think a Russell 1000 fund should be in the growth category either, but that’s a separate discussion.
Another leveraged product appears right below ROLA in the No. 2 spot, the UBS AG FI Enhanced Big Cap Growth ETN (FBG). The code word for leverage here is “enhanced,” a term that can mean almost anything in ETF context. In the iShares Enhanced U.S. Large-Cap ETF (IELG | B-73), for example, “enhanced” simply means actively managed.
Direxion Gets It Right
One issuer of leveraged products deserves a shout-out for unambiguous naming: Direxion. Here’s a great example: the Direxion Daily S&P 500 Bull 2x ETF (SPUU). The “2x” clearly conveys leverage, while “bull” gives the direction of the bet. As an added bonus, “daily” tells you the leverage reset period. Neither SFLA, ROLA nor FBG reset daily—not that you could tell from the name.
I get that today’s complex strategies can’t always be clearly communicated in a few words. Still, leveraged products have pointy edges and need to be handled deftly.
Having an unambiguous label on the box is a good first step. You’d think ETF issuers would want to be proactive on this point rather than having regulators impose their own solution someday.
At the time this article was written, the author held no positions in the securities mentioned. Contact Paul Britt at [email protected] or follow him on Twitter @PaulBritt_ETF.