iPath, the largest issuer of exchange-traded notes in the U.S., announced a major addition to its product lineup on Tuesday by rolling out 11 new leveraged ETNs. The new products included five paired products offering leveraged exposure to benchmarks underlying some of the most popular exchange-traded products, including the S&P 500, Russell 2000, and MSCI Emerging Markets Index. Also included is a note providing leveraged exposure to a VIX-related index. The new ETNs include:
|ROLA||Long Extended Russell 1000 TR Index ETN||3x||Russell 1000|
|ROSA||Short Extended Russell 1000 TR Index ETN||-3x||Russell 1000|
|RTLA||Long Extended Russell 2000 TR Index ETN||3x||Russell 2000|
|RTSA||Short Extended Russell 2000 TR Index ETN||-3x||Russell 2000|
|SFLA||Long Extended S&P 500 Index TR Index ETN||3x||S&P 500|
|SFSA||Short Extended S&P 500 TR Index ETN||-3x||S&P 500|
|MFLA||Long Enhanced MSCI EAFE Index ETN||2x||MSCI EAFE|
|MFSA||Short Enhanced MSCI EAFE Index ETN||-2x||MSCI EAFE|
|EMLB||Long Enhanced MSCI Emerging Markets Index ETN||2x||MSCI Emerging Markets|
|EMSA||Short Enhanced MSCI Emerging Markets Index ETN||-2x||MSCI Emerging Markets|
|VZZ||Long Enhanced S&P 500 VIX Mid-Term Futures ETN||2x||S&P 500 VIX Mid-Term Futures Index|
“We are delighted to expand the iPath platform with a comprehensive suite of products that provides our clients with leveraged and inverse exposure to the equity and volatility markets,” said Philippe El-Asmar, Managing Director, Head of Investor Solutions at Barclays Capital. “The leveraged iPath ETNs offer a new way to manage capital across the equity markets and we believe these investment tools will be useful for investors wishing to tailor the risk/return profile of a global equities portfolio.”
Twist On Leveraged Equity Exposure
At first glance, the new products from iPath appear to be similar to a number of leveraged products already offered by ProShares and Direxion. But the iPath products are unique in a couple of very important ways. First, they are exchange-traded notes, meaning that investors are purchasing senior, unsecured, unsubordinated debt issued by Barclays. Second, these securities do not include a daily reset mechanism, meaning that the daily performance of the products won’t reflect a compounded return. The indicative note value will be computed by multiplying the base value times a factor that is equal to the current index level divided by the level of the index on the initial valuation date. In other words, the new iPath ETNs will track a fixed multiple of the performance of the underlying index over the term of the note, prior to the deduction of expenses. So if the Russell 1000 Index gains 10% over the next ten years, ROLA should be expected to increase by 30%, regardless of the volatility in the underlying index during that period. The new ETNs are ten year notes, scheduled to mature in November 2020.
Currently, there are two primary types of leveraged ETPs available to U.S. investors. Most of the products from ProShares and Direxion seek to deliver daily results that correspond to a multiple of the daily change in an underlying index. In order to accomplish this objective, these products reset exposure on a daily basis. Funds that maintain daily resetting of leverage won’t necessarily deliver a multiple of the return on the underlying index for any period longer than a day. In oscillating markets, daily leveraged ETFs will often suffer from “return erosion,” since “winning” follow reductions in total exposure level and “losing” sessions come after exposure has been increased. In trending markets, ETFs that implement daily rebalancing may deliver returns greater than the sum of the daily multiple and the change in the underlying index over the time period.
There are also a number of leveraged products that reset exposure on a monthly basis, including a number of ETNs offered by PowerShares and Deutsche Bank. These ETPs function in a manner similar to the daily leveraged ETFs, but instead seek to deliver returns over a month-long period equal to a multiple of the change in a specified index.
Barclays also offers a line of leveraged products linked to the S&P 500 Index.
Under The Hood
The new iPath ETNs will be unlike any of the leveraged products on the market today. Instead of seeking to deliver amplified exposure over a daily or monthly time period, these ETNs will deliver results that correspond to a multiple of the return on the related index during a much longer time period (i.e., between the launch and the maturity of the notes–about ten years). According to iPath, the ETNs will be automatically terminated if the principal amount reaches certain levels (between 20% and 30% of the original principal amount of the notes).
The nature of these ETNs means that the leverage factors highlighted in the table above reflect the effective leverage only upon inception. As the underlying indexes move, so too will the effective leverage offered by the notes. For the long leveraged notes, for example, the effective leverage factor will decrease as the underlying indexes rise, and vice versa.
The expense ratio for each of the S&P 500 ETNs will be 0.35%. The ETNs linked to Russell indexes will charge 0.50% while those linked to MSCI benchmarks will charge 0.80%. The annual fee for VXZ is set at 0.89%. Most leveraged ETFs on the market today charge expense ratios of 0.95%, meaning that the new iPath products will be undercutting existing funds in the expense department.
Disclosure: No positions at time of writing.
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