Leveraged Commodity, Currency ETFs Launch

November 25, 2008

ProShares is bringing its popular leveraged and inverse investing concept to the commodities and currency markets.


The company launched ETFs on Nov. 25 that provide leveraged (200%) and inverse (-200%) exposure to a broad-based commodity index, crude oil, and the Euro and Yen currencies. Gold and silver ETFs using the same approach will debut in a few weeks.

The new ETFs should heat up competition for assets in the alternative asset space. ProFunds claims these are the first leverage and inverse ETFs in commodities and currencies. Deutsche Bank and PowerShares, however, have a series of exchange-traded notes (ETNs) that offer 2x leveraged and inverse exposure to gold, the U.S. dollar, crude oil, commodities, agriculture and base metals; similarly, Van Eck offers ETNs that provide 200% and -200% exposures to the Euro.

Still, many people prefer the ETF structure compared to ETNs, and the ProShares name will be sure to attract attention.

The new ProShares ETFs are:

  • Ultra DJ-AIG Commodity (NYSEArca: UCD)
  • UltraShort DJ-AIG Commodity (NYSEArca: CMD)
  • Ultra DJ-AIG Crude Oil (NYSEArca: UCO)
  • UltraShort DJ-AIG Crude Oil (NYSEArca: SCO)
  • Ultra Euro (NYSEArca: ULE)
  • UltraShort Euro (NYSEArca: EUO)
  • Ultra Yen (NYSEArca: YCL)
  • UltraShort Yen (NYSEArca: YCS)

Next week, ProShares will launch:

  • Ultra Gold (NYSEArca: UGL)
  • UltraShort Gold (NYSEArca: GLL)
  • Ultra Silver (NYSEArca: AGQ)
  • UltraShort Silver (NYSEArca: ZSL)

The question for investors is should they really be playing with leverage in the volatile ETF market? Oil prices are down 45% over the past few months, and most broad-based commodity indexes are down nearly as much. It's not hard to imagine what would have happened to a fund that was levered 2-to-1 against the price of commodities in recent days.

In fact, you don't have to imagine. The PowerShares DB Double Long Commodity Index ETN (NYSEArca: DYY) tracks the broad-based DB Commodity Index; the fund was down 68.92% in the past three months through Nov. 24, according to Morningstar. The inverse version of the fund, the PowerShares DB DoubleShort Commodity Index ETN (NYSEArca: DEE), was up 134% over the same time period.

The ProShares ETFs carry an expense ratio of 95 basis points, while the competing PowerShares DB ETNs charge just 0.75% and the Van Eck currency ETNs charge just 0.65%. ProShares may be betting that the higher expenses will be less important to investors than the ETF vs. ETN question.

ETNs trade like ETFs but are actually debt notes, subject to the full credit risk of the underwriting bank. If, for instance, Deutsche Bank were to go bankrupt, noteholders in the PowerShares DB ETNs would lose the majority of their investments. The ETN industry as a whole has had net outflows in recent months, as investors have become increasingly concerned about the issues surrounding credit risk and credit quality. 

ProShares come with their own credit risks, as the company uses swap agreements to achieve leveraged and inverse exposure in the funds. However, the amount of credit risk is significantly smaller: while 100% of the assets in an ETN are subject to credit risk, the credit risk in a swap agreement is limited to the change in the value of the investment from the time the swap agreement was put in place. Because ProShares renegotiates its swaps regularly, this amount is typically small.

The prospectus for the new ProShares ETFs can be found here.


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