If you agree with me that the battered U.S. financial market is at or near the bottom, the ProShares Ultra Financial ETF (AMEX: UYG) offers the dual advantages of one-stop shopping and leverage. It's not an investment for the faint-of-heart, but there is potential for a big capital gain for those who can deal with risk.
The objective of this ETF is to earn returns before expenses and fees that correspond to twice the daily performance of the Dow Jones U.S. Financials Index. As you might expect, this fund has been absolutely hammered as a result of the subprime crisis, the credit crunch, the U.S. housing slump, and now bank failures. The price tumbled from a high of $72.13 in February 2007 to a low of $14.75 earlier this month. (Figures in U.S. dollars.) That's a gut-wrenching drop of almost 80%! But we may have seen the bottom. The shares started to rally last week, finishing on Friday at $20.40.
The components of the Dow U.S. Financials Index read like a Who's Who of Big Finance. They include JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), Citigroup (NYSE:C), Wells Fargo (NYSE:WFC) (which came out with decent results last week), and Goldman Sachs (NYSE:GS).
The fund has an MER of 0.95%. Investors receive quarterly distributions which vary dramatically. For example, in June 2007 the units paid out 70.4c per unit. This June, the distribution was only 9.8c.
Of course, there is risk here. It appears all the bad subprime news still hasn't come out and more bank failures are possible, as Federal Reserve chairman Ben Bernanke warned Congress last week. The fact the portfolio is leveraged heightens the risk. But the leveraging also increases the upside potential if, as I expect, we begin to see a recovery in the financials sector in the coming months.
Action: The ProShares Ultra Financials ETF is a buy for aggressive investors.