ETRACS, the exchange traded notes (ETN) issuing arm of Swiss banking major UBS AG, has launched a leveraged S&P tracking ETN that resets its holdings every month.
The ETRACS Monthly Reset 2X Leveraged S&P 500 Total Return ETN (SPLX) will reflect the monthly compounded 2X, or 200 percent leveraged performance of the S&P 500 Total Return Index. The S&P 500 Total Return Index is one of the leading benchmarks for measuring the performance of large cap US stocks.
If the US economy continues to grow at current pace, the Fed will most likely wind up its asset purchase program by the end of this year. The European Central Bank and the Bank of Japan, however, are likely to continue with their ultra-loose monetary policies well into 2016, which in turn is likely to push up asset prices globally. Many investors believe US equities are likely to give decent returns following last year’s solid performance.
The S&P 500 Total Return Index is considered by many as the bellwether for the US economy. Since the new fund tracks a “total return index,” it reflects both the price performance of the index constituents and the reinvestment of dividends on the index constituents. As on December 31, 2013, the index constituents had an average market capitalization of more than $34.99 billion and a median market capitalization of $16.52 billion.
Sector-wise, Information Technology, Financials, Health Care, Consumer Discretionary and Industrials receive double-digit allocation, while Energy, Consumer Staples, Materials, Utilities and Telecommunication Services receive single digit allocation. The top five sectors contribute more than 70 percent of the fund, suggesting under-representation of defensive sectors.
You should note, SPLX resets its leverage every month while most ETFs or ETNs reset daily, meaning there are only 12 resets every year compared with approximately 252 reset events per year for daily-reset products.
That means SPLX is likely to benefit less from compounding effects during a trending bull market compared to leveraged products that rebalance daily. Also, liquidity could be a problem during initial trading days as an investor must elect to redeem at least 50,000 of the same series of ETNs for UBS to repurchase the units.
The fund has an annual expense ratio of 0.85 percent.
Disclosure: No holdings
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