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ETRACS 2x Leveraged ETN Snapshot - June 2017



  • MORL/MRRL are the highest yielding 2x ETNs.
  • MLPQ, MLPZ and BDCL/LBDC have moved lower within their 52-week ranges.
  • 3-month LIBOR continues to rise, increasing 2x ETN expense ratios.

Author's note: This article was released to members of the Cambridge Income Laboratory about 1 month ago.

For the inaugural edition of the ETRACS 2x Leveraged ETN Snapshot, please see here. Data are taken from the close of Jun. 13th, 2017. Previous articles on the Snapshot can be searched using the keyword "ciletn."

Fund additions, closures, or notable adjustments

No new ETRACS 2x fund additions or closures.

The funds

The following table shows the ETNs in the ETRACS 2x leveraged line-up, with the fund name, ticker, inception date, assets under management, average volume, yield, expense ratio excluding 3-month LIBOR, adjusted total expense ratio including LIBOR, and the corresponding 1x fund (where available). Yield and expense ratio statistics are discussed further in their separate sections below.

Fund Ticker Inception Assets/m Volume/k Yield TER Adjusted TER 1x fund
Monthly Reset 2xLeveraged S&P 500 Total Return ETN (NYSEARCA:SPLX) 3/2014 6.9 1.2 0.00% 1.25% 1.25% (NYSEARCA:SPY)
Monthly Pay 2xLeveraged S&P Dividend ETN (NYSEARCA:SDYL) 5/2012 17.8 2.5 5.02% 0.70% 0.98% (NYSEARCA:SDY)
Monthly Pay 2xLeveraged Dow Jones Select Dividend Index ETN (NYSEARCA:DVYL) 5/2012 36.0 4.7 6.53% 0.75% 1.00% (NYSEARCA:DVY)
Monthly Pay 2xLeveraged US High Dividend Low Volatility ETN (NYSEARCA:HDLV) 9/2014 19.2 7.5 10.08% 1.45% 1.35%
Monthly Pay 2xLeveraged US Small Cap High Dividend ETN (NYSEARCA:SMHD) 3/2015 26.1 19.4 15.65% 1.65% 1.45%
Monthly Reset 2xLeveraged ISE Exclusively Homebuilders ETN (NYSEARCA:HOML) 3/2015 5.9 3.2 1.65% 1.45%
Alternative equity
Monthly Pay 2xLeveraged Wells Fargo MLP Ex-Energy ETN (NYSEARCA:LMLP) 6/2014 25.8 29.8 11.17% 1.45% 1.35% (NYSEARCA:FMLP)
Monthly Pay 2xLeveraged MSCI US REIT Index ETN (NYSEARCA:LRET) 5/2015 7.1 4.4 8.37% 1.65% 1.45% (NYSEARCA:VNQ)
Monthly Pay 2xLeveraged Mortgage REIT ETN (NYSEARCA:MORL) 10/2012 387.8 302.9 18.19% 0.80% 1.03% (NYSEARCA:MORT)
Monthly Pay 2xLeveraged Mortgage REIT ETN Series B (NYSEARCA:MRRL) 10/2015 18.2

This article was written by

Stanford Chemist profile picture

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Comments (30)

NV_GARY profile picture
The main difference between the original "Series A" ETNs and the Series B ETNs is that the former are co-guaranteed by both UBS AG and UBS Switzerland AG, whereas the newer the latter are guaranteed by UBS AG only. In theory, this should make the Series B ETNs less valuable than the Series A, since the former are solely guaranteed by UBS AG.

I think you got mixed-up on the last part of the statement - sub latter for former?
Stanford Chemist profile picture
Thanks for spotting the poor wording Gary, reading over it again, I think I meant "former" in that very sentence itself rather than the previous sentence... (i.e. referring to Series B being solely guaranteed by UBS AG).. apologies for the confusion
packrat35 profile picture
MORL/MRRL added to my watch list. Will probably add these to my portfolio soon. Thanks for the informative article.
Smylie profile picture
Once again I guess I just don't understand. Why would anyone buy any of these 2x ETNs if they were in it for the rise in price. I use these in a tax advantage account and I just keep piling on the dividends in there. On the large months like this month's that's an extra $3,000. Drip that back into the account and you have a recipe for success.....So I guess I just don't get it.....
mepace profile picture
Do ETNs generate K-1s?
cubeless profile picture
Stanford Chemist profile picture
Thanks for the info cubeless
Robert Hairgrove profile picture
IIRC, all distributions are classified as ordinary income for tax purposes (similar to bond interest payments), regardless of the source of the underlying "assets". I put "assets" in quotes because it is not guaranteed that UBS will actually own the index assets at any given time, although it is assumed they do. Therefore, no K-1's are issued.

The UBS prospectus is a little vague regarding the tax treatment of the distributions of the 2x ETNs -- I had dabbled in CEFL and MORL a couple of years ago, but got out again after becoming disappointed with their performance.
Great analysis as always with important details. Can you shed some light on how these ETNs performed during previous rate hikes.
I believe not all brokerages allow ETNs inside IRA.
What do you do with schedule K-1 in an IRA?
Stanford Chemist profile picture
Hi Sanya,

That's a very good question. I'll put that on my to-do list!
NV_GARY profile picture
Sanya R-
ETNs pay Interest - per IRS reporting.
mrmedusa profile picture
Thanks, and same to you.
mrmedusa profile picture
Thanks for writing on these. I tend to use CEFL as a sort of money market substitute, selling some when an opportunity comes up and then adding with other dividends, or using the interest to add to something else. I think after reading this one I will swap some of the CEFL for some HDLV.
Stanford Chemist profile picture
Hi mrmedusa, thanks for sharing your strategy. Good luck!
PendragonY profile picture
From what I have seen, daily reset leveraged funds have an issue with decay over a monthly period (that was a 3x fund, so likely its a bit longer with 2x funds). So a monthly reset fund would have decay issues over a 30 month period (almost 3 years), so as long as the trend of the index leveraged had some up-trend over 3 year time periods, decay wouldn't be a huge problem.
Stanford Chemist profile picture
Hi PendragonY, thanks for the excellent comment. What you say matches with my previous research that I linked in the article (https://seekingalpha.c...)
PendragonY profile picture

Yours is a good article about this type of fund. Not like some articles several years back that were pushing 3x leveraged daily reset funds as long term investments. The author "simulated" the results of investing in a fund for the last 20 years to show what a great investment it was. It wasn't. In part because he ignored one provision of the fund which was it would be closed if its index dropped a certain amount. Turns out over the last 20 years that condition was hit several times. And much of the claimed success in the investment was buying it when it would have already been closed (and shareholders would have lost 90% of their investment).

I hadn't noticed, but do any of the monthly reset funds have a provision for mandatory closing?
Stanford Chemist profile picture
Hi Pendragon, thanks for sharing your insight. They do - most of them have a condition to terminate if the unit price hits $5, or if the underlying index drops 30% in a month, as counted from the start of each month (i.e. the 2x fund drops 60%). Two newer funds, MLPZ/MLPQ, do not have the 30% termination trigger (as described in https://seekingalpha.c...)
Excellent analysis of these 2x ETNs of UBS. Of course there are multiple risks associated with these ETNs - how could be otherwise for a security paying a double digit yield? However, I feel that the benefits of holding these leveraged securities do out weigh the risks. I hold MORL, BDCL, CEFL, and DVHL in about equal dollar amounts within an IRA with the total of the four constituting about 16% of investment portfolio. They're great for generating annual RMDs.

One other advantage I see in these 2x ETNs is that they are widely diversified which follows a good piece of advice in combat: "Don't let one grenade get you all!"
Stanford Chemist profile picture
Hi karchlg (any relation to stevlg?), thanks for the comment and for sharing your insight. Agree that some of the ETNs are quite diversified (e.g. CEFL and DVHL) and when you combine several together you get the extra diversification on top of that
Stevlg profile picture
Another excellent article and very helpful.
'if the notes were to deviate significantly above their NAV (say >10%),"
Are you currently aware of any of the notes that arena fact in that situation?
Your response appreciated and thanks for the article.
Stanford Chemist profile picture
Hi stevlg, thanks for commenting and glad you found it useful. I haven't come across the situation mentioned for the 2x ETRACS ETNs, although such events have happened before to other ETNs (e.g. TVIX)
(see https://seekingalpha.c...)
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