PowerShares rolled out the first 3x leveraged currency exchange-traded products earlier this week. PowerShares DB 3x Long US Dollar Index Futures ETN (UUPT) and PowerShares DB 3x Short US Dollar Index Futures ETN (UDNT) will track leveraged multiples of the Deutsche Bank Long U.S. Dollar Index Futures Index using a monthly reset of the leverage.
UUPT and UDNT are ETNs, which are long-term unsecured debt obligations that carry the credit risk of Deutsche Bank, the note issuer. They do not actually invest in the components of the underlying index, which consists of futures contracts whose underlying asset is the DB Long U.S. Dollar Index. That index measures the performance of the U.S. dollar against a weighted basket of six major world currencies: The euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and the Swiss franc.
UUPT seeks to provide +300% of the monthly return of the underlying index, while UDNT seeks to provide -300% (inverse) of the monthly return of the underlying index.
The monthly reset of leverage helps to mitigate but not eliminate the compounding effects of leverage rebalancing. UUPT and UDNT will make great tools for investors that understand the risks and nuances of ETNs, leverage, leverage reset, futures contracts, and the currency markets. Investors who do not fully comprehend this behavior should avoid these products.
Disclosure: 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.