By Stoyan Bojinov
Amid all of the financial worries stemming from the eurozone overseas, iPath launched two new U.S. Treasury ETNs this week, including options for establishing both long and short exposure to intermediate term Treasury futures. The iPath U.S. Treasury 5-year Bull ETN (DFVL) offers long exposure to the Barclays Capital 5Y U.S. Treasury Futures Targeted Exposure Index, which seeks to produce returns that track movements in response to changes in the yields available to investors purchasing 5-year U.S. Treasury notes. The iPath U.S. Treasury 5-Year Bear ETN (DFVS) offers inverse exposure to the same index described above, giving investors an option for taking a short position in 5-year Treasury futures contracts. To accomplish this objective, the performance of the index tracks the returns of a notional investment in a weighted long position in relation to 5-year Treasury futures contracts, as traded on the Chicago Board of Trade.
These two new products round out iPath’s exposure within the fixed-income market, complementing a lineup that already included similar ETNs linked to indexes focusing on 2-year and 10-year Treasuries. “The new ETNs allow investors the opportunity to further fine tune their exposures with long and short views on 5-year U.S. Treasury futures,” said Kevin Burke, Head of Investor Solutions at Barclays Capital. “Today’s launch demonstrates our ongoing commitment to offering investors a comprehensive suite of innovative investment products across asset classes.”
Like all iPath ETNs, the new products are senior, unsubordinated, unsecured debt securities issued by Barcplays Bank PLC. That means investors in these products are exposed to credit risk of issuing institutions, but avoid the tracking error that can potentially create a drag on returns in a futures-based strategy. The two 5-Year bond ETNs will mature in July 2021.
The long 5-Year Treasury ETN is unique in that the underlying holdings of the related index are not U.S. Treasuries but futures contracts. That has the potential to deliver a risk/return profile that differs somewhat from a traditional ETF that invests directly in Treasuries. It’s also interesting to note that the underlying holdings of both DFVL and DFVS are actually 5-year U.S. Treasury futures contracts, as opposed to actual Treasury holdings. Both the U.S. Treasury 10-Year Bull ETN (DTYL) and 2-Year Treasury Bull (DTUL) have performed quite well this year. DTYL is up more than 22% year-to-date while DTUL has already added 10% in 2011.
Both ETNs will employ an index multiplier that provides the investor at maturity or upon redemption a participation rate of $0.10 gain or loss per each 1.00 point increase or decrease, respectively, in the level of the index. The indicative value of the notes is calculated by multiplying the index multiplier by the daily index performance, which is added to the daily interest that accrued from a notional investment of the value of the ETN at the 28-day U.S. Treasury Bill rate.
Both new ETNs charge an expense fee of 0.75%, which comes in well above the average for the the Government Bonds ETFdb Category: a mere 0.27%. Investors looking for ETFs which offer comparable intermediate-term exposure to U.S. Treasuries should consider checking out FIVZ, ITE, and SCHR.
Disclosure: No positions at time of writing.
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