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Barclays launched eleven new iPath exchange-traded notes (ETNs) yesterday, November 30, 2010. The new products provide leveraged long and short exposure to MSCI Emerging Markets, MSCI EAFE, Russell 1000, Russell 2000, and S&P 500 Indexes. A new mid-term VIX product is also included.

The press release (pdf) touts the “leveraged” nature of the products, but it fails to describe what that leverage entails. The overview page and fact sheet for each of the eleven products is no help, either. The marketing literature simply says each product is “linked to a leverage return on the performance” of the underlying index.

Why Barclays would want to hide this from investors is beyond me. The only place that Barclays is currently providing that information is the last place that investors want to look for it – in the 293-page prospectus for the long ETNs, the 294-page prospectus for the short ETNs, and the 270-page prospectus for the new VIX ETN. Even in there, the information is not easy to find.

The MSCI and VIX based ETNs have the word “Enhanced” as part of their name. Barclays doesn’t define the term in any of their literature, but this implies these ETNs use 2x no-reset leverage. The Russell and S&P based ETNs have the word “Extended” as part of their name, which implies they use 3x no-reset leverage.

This is not the first time that Barclays has introduced ETNs that do not reset their leverage. They launched five no-reset ETNs under the BARX ETN+ brand a little over a year ago, all based on the S&P 500. That means the two 3x S&P 500 ETNs launched last year (BXUB and BXDD) are very similar to the new ones launched yesterday (SFLA and SFSA), except the initial 3x leverage is being established at about a 10% higher level.

Fees on these new products are also not well explained. Barclays chose to display all fees in two parts while never once adding the two parts together to tell investors the “total” fee. I’ve done some of the math for you, and total fees range from a low of 0.85% to a high of 3.30%.

The eleven new ETNs are:

  1. iPath Long Extended S&P 500 TR Index ETN (SFLA) is linked to a 3x no-reset leveraged return of the S&P 500 Total Return Index minus more than 0.95% in fees (investor fee of 0.35% and finance fee of 0.60% + 3mth LIBOR). Additional information is in the SFLA overview and SFLA fact sheet (pdf).
  2. iPath Short Extended S&P 500 TR Index ETN (SFSA) is linked to a 3x no-reset leveraged inverse return of the S&P 500 Total Return Index minus 0.85% (0.35% investor fee and 0.50% borrow fee). Additional information is in the SFSA overview and SFSA fact sheet (pdf).
  3. iPath Long Extended Russell 1000 TR Index ETN (ROLA) is linked to a 3x no-reset leveraged return of the Russell 1000 Total Return Index minus more than 1.10% in fees (investor fee of 0.50% and finance fee of 0.60% + 3mth LIBOR). Additional information is in the ROLA overview and ROLA fact sheet (pdf).
  4. iPath Short Extended Russell 1000 TR Index ETN (ROSA) is linked to a 3x no-reset leveraged inverse return of the Russell 1000 Total Return Index minus 1.50% (0.50% investor fee and 1.00% borrow fee). Additional information is in the ROSA overview and ROSA fact sheet (pdf).
  5. iPath Long Extended Russell 2000 TR Index ETN (RTLA) is linked to a 3x no-reset leveraged return of the Russell 2000 Total Return Index minus more than 1.10% in fees (investor fee of 0.50% and finance fee of 0.60% + 3mth LIBOR). Additional information is in the RTLA overview and RTLA fact sheet (pdf).
  6. iPath Short Extended Russell 2000 TR Index ETN (RTSA) is linked to a 3x no-reset leveraged inverse return of the Russell 2000 Total Return Index minus 2.25% (0.50% investor fee and 1.75% borrow fee). Additional information is in the RTSA overview and RTSA fact sheet (pdf).
  7. iPath Long Enhanced MSCI EAFE Index ETN (MFLA) is linked to a 2x no-reset leveraged return of the MSCI EAFE Net Total Return Index minus more than 1.40% in fees (investor fee of 0.80% and finance fee of 0.60% + 3mth LIBOR). Additional information is in the MFLA overview and MFLA fact sheet (pdf).
  8. iPath Short Enhanced MSCI EAFE Index ETN (MFSA) is linked to a 2x no-reset leveraged inverse return of the MSCI Emerging Markets Net Total Return Index minus 2.55% (0.80% investor fee and 1.75% borrow fee). Additional information is in the MFSA overview and MFSA fact sheet (pdf).
  9. iPath Long Enhanced MSCI Emerging Markets Index ETN (EMLB) is linked to a 2x no-reset leveraged return of the MSCI Emerging Markets Net Total Return Index minus more than 1.40% in fees (investor fee of 0.80% and finance fee of 0.60% + 3mth LIBOR). Additional information is in the EMLB overview and EMLB fact sheet (pdf).
  10. iPath Short Enhanced MSCI Emerging Markets Index ETN (EMSA) is linked to a 2x no-reset leveraged inverse return of the MSCI Emerging Markets Net Total Return Index minus 3.30% (0.80% investor fee and 2.50% borrow fee). Additional information is in the EMSA overview and EMSA fact sheet (pdf).
  11. iPath Long Enhanced S&P 500 VIX Mid-Term Futures ETN (VZZ) is linked to a 2x no-reset leveraged return of the S&P 500 VIX Mid-Term Futures Index minus more than 1.78% in fees (investor fee of 0.89% and finance fee of 0.89% + 3mth LIBOR). Additional information is in the VZZ overview and VZZ fact sheet (pdf).

Although investors tend to complain about leverage that employs daily reset, the practice does keep your investment from going below zero under extended unfavorable market conditions. In other words, the daily reset protects your investment.

Since these new products do not reset their leverage, something else must be done to protect investors from themselves – automatic termination. The S&P 500 and Russell 1000 based ETNs will automatically terminate if their value drops to 20% of their original value. Since they are 3x leveraged, that implies a 27% move from current levels in either index over the next 10 years will cause one or more of these ETNS to terminate.

The Russell 2000 based ETNs will automatically terminate if their value drops to 30% of their original value. Since they are 3x leveraged, that implies about a 23% move from current levels will cause termination. The four MSCI based ETNs have their termination triggers set at 25% to 45% of current value. They are only 2x leveraged, so a move in the underlying index between 27% and 37% will cause termination. The new VIX ETN will terminate if it falls to 33% of its original value (or 38% decline in the underlying index).

I believe there is nearly a 100% chance that each of these indexes will move in excess of 37% from current levels sometime in the next 10 years. Therefore, there is nearly a 100% chance that at least half of them will not reach maturity.

I will repeat what I said when Barclays came out with their first suite of no-reset leveraged ETNs: Be careful what you wish for. For all the leveraged fund critics that either do not like or do not understand daily (or monthly) reset of leverage and want a vehicle without path-dependent performance, your wish has come true. However, unless you bought them yesterday, you will not be getting the exact 2x or 3x index exposure you desire. You can’t have everything.

Disclosure covering writer, editor, and publisher: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

Source: Careful What You Wish For: 11 New iPath ETNs With Indescribable Leverage