VelocityShares moves beyond VIX ETNs into the world of precious metals.
VelocityShares, a recent newcomer in the world of volatility-related ETNs, launched eight new leveraged ETNs today with long and short positions in precious metals the company said are designed to fulfill an unmet need in the marketplace.
The funds join a marketplace of ETFs rather than ETNs sponsored by the leaders in the world of leveraged and inverse ETNs, Bethesda, Md.-based ProShares and Newton, Mass.-based Direxion. The Direxion products, however, are based on an index of gold companies, as opposed to gold and silver bullion prices.
Leveraged and inverse ETPs have come under recent scrutiny by regulators, and last week ETFs were the topic of critical reports in the New York Times and on CNBC. The types of ETPs marketed by VelocityShares might well receive special attention on Wednesday, Oct. 19, at the U.S Senate’s Banking subcommittee hearing “Market Microstructure: Examination of Exchange-Traded funds (ETFs).”
Nick Cherney, Chief Investment Officer and co-founder of Velocity Shares, said that ETPs aren’t a destabilizing force, and that much of the recent criticism of leveraged ETPs has to do with the fact that these exotic instruments are far more public than other more complex products on the market.
“Our view is that these products (ETPs) are extraordinarily transparent and people focus on them because they are visible.”
ProShares has a double-exposure bull-and-bear pair focused on gold bullion prices and another pair targeting physical silver prices. Direxion meanwhile has a bull-and-bear pair of double-exposure funds focused on gold companies, though they will shift to triple exposure on Dec. 1.
“A lot of people who trade gold and silver use them to play a negative correlation to equities,” Cherney.
“Also, there are a lot of relative value trades in the precious metals. Leverage is very useful for putting on effective value trades,” Cherney said.
Still, the new ETNs are rebalanced daily, and are thus designed for sophisticated investors who pay attention to daily movements of their funds. The prospectus noted that if the applicable index experiences high volatility, there’s a significant chance that the ETNs could lose all of their value, even if the index is flat.
The eight new VelocityShares ETNs, and their costs are:
- VelocityShares 3X Long Gold ETN linked to the S&P GSCI Gold Index, (NYSEArca: UGLD) with a 1.35 percent expense ratio
- VelocityShares 3X Inverse Gold linked to the S&P GSCI Gold Index Excess Return (NYSEArca: DGLD) with a 1.35 percent expense ratio
- VelocityShares 3X Long Silver ETN linked to the S&P GSCI Silver Index (NYSEArca: USLV) with a 1.65 percent expense ratio
- VelocityShares 3X Inverse Silver ETN linked to the S&P GSCI Platinum Index ER(NYSEArca: DSLV) with a 1.65 percent expense ratio
- VelocitysShares 2X Long Platinum ETN linked to the S&P GSCI Platinum Index ER (NYSEArca: LPLT) with a 1.35 percent expense ratio
- VelocityShares 2X Inverse Platinum ETN linked to the S&P GSCI Platinum Index ER (NYSEArca: IPLT) with a 1.35 percent expense ratio
- VelocityShares 2X Long Palladium ETN Linked to the S&P GSCI Palladium Index (NYSEArca: LPAL) with a 1.35 percent expense ratio
- VelocityShares 2X Inverse Palladium ETN linked to the S&P GSCI Palladium Index ER (NYSEArca: IPAL) with a 1.35 percent expense ratio
The existing ProShares precious metals leveraged ETFs, which, like the VelocityShares products are linked to bullion prices are:
- ProsShares Ultra Gold 2X (NYSEArca: UGL) with an expense ratio of 0.95 percent
- ProShares UltraShort Gold 2X (NYSEArca: GLL) with an expense ratio of 0.95 percent
- ProShares Ultra Silver 2X (NYSEArca: AGQ) with an expense ratio of 0.95 percent.
- ProShares UltraShort 2X (NYSEArca: ZSL) with an expense ratio of 0.95 percent
The Direxion equity funds are:
- Direxionshares Daily Gold Miners Bull 2X Shares (NYSE Arca: NUGT) with a 0.95 percent expense ratio
- Direxionshares Bear 2X Shares (NYSEArca: Dust) with an expense ratio of 0.95 percent.
Early Redemption Costs
Along with the possibility to earn leveraged returns, the prospectus notes that there are certain restrictions regarding early redemption.
Investors must offer at least 25,000 ETNs of one series for redemption.
Another important caveat is that is that any payout on the ETNs is subject to the ability of Credit Suisse, the backer of the VelocityShares notes, to pay its obligations related to the ETNs.
There’s also an early redemption charge of up to 0.05 percent per ETN, which is based on each security’s closing indicative value.