ETF Watch: June 6-11


By Heather Bell


ELEMENTS Rolls Out Cyclical Commodity ETN

The brand new ELEMENTS Linked to the S&P Commodity Trends Indicator – Total Return (NYSE: LSC) is not your typical commodity ETN. The S&P CTI covers 16 commodity futures in six different sectors—nothing unusual about that. But rather than simply using long positions in each commodity, LSC takes a long/short approach based on momentum trends in each commodity sector.

The theory behind LSC is that most commodity sectors are cyclical in nature—they tend to go through long periods of up and down movements. As a result, the S&P CTI takes long or short positions in each sector based on how current prices compare to an exponential—moving price—average (i.e., more recent prices are weighted more heavily in calculating the moving average).

Interestingly, Energy is not viewed as cyclical and so is never short in the index. Besides Energy, the represented sectors include Grains, Softs, Livestock, Precious Metals and Industrial Metals. The ETN is the first to be issued by HSBC USA Inc.; it charges an expense ratio of 0.75%.

Read the prospectus here.


ProShares Files For Family Of Credit Default Swap ETFs

ProShares has filed for a group of ETFs tracking credit default swap indexes. The eight proposed funds will track two indexes: the CDX North America Investment–Grade Index and the CDX North America High–Yield Index. Both indexes are provided by Markit.

Credit default swaps are essentially insurance contracts sold to cover the possibility of default on a debt note. The seller of a CDS agrees to pay the buyer of the CDS the full value of a note if that note goes into default. The CDS market is a hugely liquid market, with an estimated $45 trillion in contracts outstanding, according to Wikipedia.

Credit default swaps have been at the center of the financial crisis. One of the reasons why the Federal Reserve was so concerned about Bear Stearns ––– and one of the reasons it was vulnerable to the impact of a loss of confidence ––– is that it owned a huge number of CDS contracts. Concern that it wouldn't be able to make good on its promises in these markets helped spell its demise. A company called ETF Spreads previously filed for ETFs tied to CDX indexes. It's not clear what the status of that filing is.

Read the prospectus here.

PowerShares Looks To Ireland

A recent filing from PowerShares highlights an interesting market. The PowerShares Ireland Portfolio will track the Nasdaq OMX Ireland Index. The index is weighted by modified market capitalization; component companies must have a minimum market cap of $200 million and a three–month average daily traded volume of $1 million.

The island country's economy boomed in the 1990s, leading some to refer to it as a Celtic Tiger, and it has continued to grow. This isn't the first filing to cover Ireland – just a little while ago State Street Global Advisors filed to create a similar fund. (See the May 15 – May 20 issue of ETF Watch here.) Interestingly, there is no iShares ETF from Barclays Global Investors that covers Ireland.

The fund is set to list on the Nasdaq Stock Exchange.

Read the prospectus here.

RevenueShares Seek To Launch Sectors

RevenueShares, the firm that launched a group of ETFs featuring the components of major S&P size indexes reweighted by revenues, has filed to launch another group of similar funds. This time, RevenueShares seeks to apply its methodology to the components of the S&P 500 sectors: Consumer Discretionery, Consumer Staples, Energy, Financials, Healthcare, Industrials, Information Technology, Materials and Utilities.

The existing RevenueShares, which include revenue–weighted versions of the S&P 500, the S&P MidCap 400 and the S&P SmallCap 600 indexes, have total combined assets of about $33 million.

The new funds are expected to list on the NYSE Arca Exchange and charge an annual expense ratio of 0.49%.

Read the prospectus here.

MacroShares Files For Products Tied To Home Price Index

MacroMarkets has filed papers with the Securities and Exchange Commission for the right to launch Up and Down Macros tied to the S&P/Case–Shiller Composite 10 Home Price Index. The Case–Shiller is the leading index of home prices across the nation. Its value, reported monthly, is tied to the average price of a home in 10 major metropolitan markets, including New York, Boston, San Francisco and Los Angeles.

The new Macros will allow investors to bet on the direction of the home price index, giving them the first chance ever to trade or hedge home prices from the comfort of a traditional brokerage account.

Interestingly, the funds will be levered by a factor of two, so that the MacroShares Major Metro Housing Up (NYSE: UMM) ETF will deliver two–times the return of the benchmark index and the MacroShares Major Metro Housing Down (NYSE: DMM) will deliver two–times the inverse return of the index.

These products work like a teeter–totter. The funds can only be offered in pairs, with equal number of Up and Down shares. If home prices go up, assets are shifted from the Down Macro to the Up Macro, and vice–versa. The funds are limited in how far they can move. Because they work like a teeter–totter, the down fund can only fall 100% (reflecting a 50% drop in house prices) while the up fund can only rise 100% (reflecting a 50% rise in home prices). After that, the funds will be liquidated and investors will be paid based on the net asset value.

Read the prospectus for the "Down" fund here.

Read the prospectus for the "Up" fund here.