By Matt Hougan
Dave Nadig is asking the wrong questions about the new Barclays ETNs.
In his recent feature article, he bemoans the overwhelming complexity of the new products. His opinion seems to be: “Neat idea, but too complex for most people to understand."
Dave may be right, but I think he's approaching the question incorrectly.
The question that matters to investors is this: If you want to achieve leveraged exposure to the S&P 500 over the next month (or two months or six months or a year), are you better off with the Barclays ETNs or with a ProShares or Direxion product?
To use your focus, which delivers a more complicated path of returns?
Let’s think about each.
When you buy the ProShares Ultra S&P 500 ETF (NYSE: SSO), you get 200% of the daily return of the S&P 500, minus fees, which amount to 0.95% per year. The funds do a great job capturing that daily return. Unfortunately, due to compounding, there’s no guarantee what the return will be over the long-haul. It could be 250% or 150% or -50%. You literally cannot know. It depends on the holding period and market volatility.
Contrast that with the new Barclays products. When you buy one of these ETNs, you are getting essentially fixed leveraged or inverse exposure to the market. If you bought the Barclays ETN+ Long C S&P 500 (NYSEArca: BXUC) on the day it launched, you would receive 200% of the return of the S&P 500 from the day you bought until the day you sell, minus expenses. If the S&P 500 goes up 10%, you’re investment will return 20%, before fees.
That leverage changes for investors who buy on Day 2 or 3 or 200, but honestly, that’s not important. There’s no magic to the round numbers of 200% or 300%. 187% or 234% are fine, too, as long as you know what to expect. It will be very easy to find out what the leverage amount is on any given day.
The only true complicating factor---and it is a serious one--- is the expense ratio, which is 0.75% plus “financing costs.” For each share of BXUC, financing costs reflects the short-term Treasury yield on $100.
In an environment of high interest rates, or an environment where the share price of the ETN is low, this would be a serious complication. But with the Fed Funds Rate at 0% and the note trading around $100/share, it’s not much of an issue for now.
Are these fire-and-forget products? Can you buy them today and expect to earn 200% (or 187% or whatever) of the return of the S&P 500 over the entire time you hold them?
No. But so long as interest rates are relatively low and the share price of the ETN is relatively high, you can rest assured that you will get close to the fixed leveraged return over the next month or quarter. As interest rates rise or the share price falls, that time window will shrink.
For investors looking for long-term leverage, the new Barclays ETNs are not a bad bet. For those more interested in trading, the ProShares or Direxion products will be a better choice.
None of that means I love these new products. They are complex, and the financing costs will confuse a lot of investors. But assuming they trade well (a big assumption), they have a place for a sophisticated subset of investors looking at the market.