Barclays' Intriguing New Leveraged ETNs

by: Scott's Investments

According to IndexUniverse, an intriguing leveraged ETN offering from Barclays is on the way. According to IU:

When you buy one of these ETNs, you are getting essentially fixed leveraged or inverse exposure to the market. If you bought the Barclays ETN+ Long C S&P 500 (NYSEArca: BXUC) on the day it launched, you would receive 200% of the return of the S&P 500 from the day you bought until the day you sell, minus expenses. If the S&P 500 goes up 10%, you’re investment will return 20%, before fees.

ETNs carry credit risk, unlike ETFs, and the new ETNs from Barclays have high, complicated expenses:

The only true complicating factor---and it is a serious one--- is the expense ratio, which is 0.75% plus “financing costs.” For each share of BXUC, financing costs reflects the short-term Treasury yield on $100.

In an environment of high interest rates, or an environment where the share price of the ETN is low, this would be a serious complication. But with the Fed Funds Rate at 0% and the note trading around $100/share, it’s not much of an issue for now.

Are these fire-and-forget products? Can you buy them today and expect to earn 200% (or 187% or whatever) of the return of the S&P 500 over the entire time you hold them?

No. But so long as interest rates are relatively low and the share price of the ETN is relatively high, you can rest assured that you will get close to the fixed leveraged return over the next month or quarter. As interest rates rise or the share price falls, that time window will shrink.

I'll be on the sidelines, but one intriguing play would be to use these new ETNs in conjunction with Mebane Faber's Ivy Portfolio strategy in which he studied the returns of 2x leveraged investments with moving averages (The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets). The new tickers are BXUB (3X Long S&P 500), BXUC (2X Long S&P 500), BXDB (1X short S&P 500), BXDC (2X short S&P 500), and BXDD (3X short S&P 500).

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