ProShares

A few factors affect the number of capital gains distributions to be paid out at years’ end by ETF shareholders. Factors include the path of the underlying index during the period, the size and timing of asset flows.

The impact is usually minimal in comparison to mutual fund shareholders’ responsibilities. Estimates are different from year to year and information about any fourth-quarter income distributions will be distributed separately. (Do these types of ETFs belong in your portfolio?)

For specific tax guidance, consult your tax professional.

For more stories about long-short ETFs, visit our long-short category.

The U.S. dollar has hit a 15-month low against a basket of major currencies today on positive economic news from Asia. The feeling that the Fed won’t raise rates anytime soon and the fact that central banks will continue to provide liquidity could continue to pressure the dollar, reports Bradley Davis for The Wall Street Journal. PowerShares DB U.S. Dollar Index Bearish (NYSEArca: UDN) is down slightly this morning.

Treasury Secretary Timothy Geithner said today that he’s encouraged by the efforts Japan and China have made to increase internal demand instead of relying on Americans. It’s a shift, he said, that could contribute to more stable growth. iShares FTSE/Xinhua China (NYSEArca: FXI) is up about 0.25% this morning.

Homebuilder exchange traded funds (ETFs) are trading as high as 4.5% this morning on news that Toll Brothers (NYSE: TOL) new contracts are up 42%. The luxury homebuilder also expects fourth-quarter revenue to top expectations. SPDR S&P Homebuilders (NYSEArca: XHB) is up 3.2% this morning. For more stories about real estate, click here.

UPS (NYSE: UPS), the world’s largest package delivery service, said this morning that it expects volume to grow next year amid economic recovery. The company also said it may raise shipping rates next year, and the size will be announced in December, reports Harry Suhartono for Reuters. iShares Dow Jones Transportation Average (NYSEArca: IYT) is up about 1.5% today; UPS is 8.2%. For more stories on the transportation sector, click here.

Leveraged and inverse ETFs aim to have the funds’ movements correspond to the inverse of the relevant market indicator on a daily basis.  One must keep in mind that these ETFs come with risks, as well. The biggest issue to understand is the meaning of the word “daily” when it comes to these ETFs: daily, they will track their benchmarks. The further out an investor gets, the greater the risk that the fund won’t track its benchmark perfectly. This effect is heightened in volatile markets. (Check out our special report on these investment tools).

There are a growing number of providers of such ETFs today, including Direxion, ProShares and Rydex.

These funds can be appealing to investors with the risk appetite for several reasons:

• They can be used as a hedge if an investor believes the market is due for a short-term correction. If an investor is holding a position, but doesn’t necessarily want to sell it, then a leveraged or inverse ETF can be used to hedge against any potential loss.
• They can be used to capitalize on market movements. If an investor believes that the S&P 500 is due for a nice run, a leveraged ETF to maximize this movement might be just what the investor wants. (How leveraged ETFs are misunderstood).

These funds aren’t for everyone – always be fully aware of the risks and know how they work before you invest.

For more on leveraged and inverse ETFs, visit our leveraged ETFs category.

Some examples of common inverse and leveraged ETFs are:

• ProShares Short S&P 500 (SH), which seeks to give 100% of the inverse daily performance of the S&P 500.

• ProShares Ultra S&P 500 (SSO), which seeks to give 200% of the daily performance of the S&P 500.

• Emerging Markets Bear 3x Shares (EDZ), seeks to give 300% of the inverse daily performance of the MSCI Emerging Markets Index
  

• Technology Bull 3x Shares (TYH), seeks to give 300% of the daily performance of the Russell 1000 Technology Index

• Rydex 2x Russell 2000 (NYSEArca: RRY), seeks to give 200% of the daily performance of the Russell 2000 Index

• Rydex Inverse 2x S&P MidCap 400 (NYSEArca: RMS), seeks to give 200% of the inverse daily performance of the Mid Cap 400 Index

Kevin Grewal contributed to this article.

Global economies are recovering, however, not at the fast rate commodity markets are indicating. What gives? Oil has become the inverse proxy to the U.S. dollar: as the dollar weakens, the price of oil moves higher. (Is oil in danger of becoming an investment bubble?) With the burgeoning debt piling up in the United States, the dollar looks to be under pressure to move lower for the foreseeable future, explains Steven Halpern for Blogging Stocks.

The futures market is supporting a trend that oil and gas stocks will move higher  in the months ahead, especially since many expect the dollar to remain depressed. (What else is supporting oil’s upward price moves?)

Halpern explains that if energy commodities are moving higher in the current economy, then there’s little on the horizon that would do anything but put more upward pricing pressure on the industry.

Meanwhile, gas prices are inflating as oil surges, too. In the latter part of October, gas gained 14 cents a gallon. Prices now stand at a national average of $2.70. Analysts are attributing the jump to an increase in oil prices.

Will oil and gas continue to remain strong? There are ETFs to represent both sides, but be sure to understand how these ETFs work by reading our special report on leveraged and inverse ETFs. Leveraged and inverse ETFs aren’t meant for long-term use and they’re not suitable for every investor.

For more stories about oil and gas, visit our commodity category.

• Ultra Oil & Gas ProShares (NYSEArca: DIG): up 2.9% over one month

• UltraShort Oil & Gas ProShares (NYSEArca: DUG): up 6.3% over one month

According to Will McClatchy for ETFZone, overweighting or underweighting mid-caps coming out of a bear market can be a good play for an ETF portfolio, depending on the economic conditions, and mid-caps are relatively less volatile than small-caps.

There is also the chance that a larger company may acquire a mid-cap company, which would be to the benefit of mid-cap shareholders.

Stock-picking can be difficult; how does anyone know which small- or mid-cap will graduate to large-cap status? Mid-cap ETFs can give you a diversified play on the entire asset class.

Potential investors looking into mid-cap ETFs should know that the definition of “mid-cap” varies from different fund providers. In general, though, it’s a company with a market capitalization between $2 billion and $10 billion.

For more information on mid-caps, visit our mid-cap category.

Major mid-cap ETFs include:

• Vanguard Mid-Cap ETF (NYSEArca: VO)
• iShares S&P MidCap 400 (NYSEArca: IJH)
• iShares Russell Midcap ETF (NYSEArca: IWR)
• SPDR Dow Jones Wilshire Mid Cap ETF (NYSEArca: EMM)
• SPDR MidCap ETF (NYSEArca: MDY)

Additionally, there are mid-cap ETFs that target growth or value:

• iShares Morningstar Mid Core ETF(NYSEArca: JKG)
• iShares Morningstar Mid Growth ETF(NYSEArca: JKH)
• iShares Morningstar Mid Value ETF(NYSEArca: JKI)
• iShares Russell Midcap Growth ETF(NYSEArca: IWP)
• iShares Russell Midcap Value ETF(NYSEArca: IWS)
• iShares S&P MidCap 400 Growth ETF(NYSEArca: IJK)
• iShares S&P MidCap 400 Value ETF(NYSEArca: IJJ)
• Rydex ExpressShares S&P MidCap 400 Pure Growth ETF (NYSEArca: RFG)
• Rydex ExpressShares S&P MidCap 400 Pure Value ETF (NYSEArca: RFV)
• Vanguard Mid-Cap Growth ETF (NYSEArca: VOT)
• Vanguard Mid-Cap Value ETF (NYSEArca: VOE)
• SPDR Dow Jones Wilshire Mid Cap Growth ETF (NYSEArca: EMG)
• SPDR Dow Jones Wilshire Mid Cap Value ETF (NYSEArca: EMV)

Then, there are the leveraged ETFs that provide an extra kick to benchmark performance results. Investors should know the risks involved when trading leveraged funds. (Everything you need to know about leveraged and inverse ETFs).

• ProShares Ultra Russell MidCap Growth ETF(NYSEArca: UKW)
• ProShares Ultra Russell MidCap Value ETF(NYSEArca: UVU)
• ProShares UltraShort Russell MidCap Growth ETF(NYSEArca: SDK)
• ProShares UltraShort Russell MidCap Value ETF(NYSEArca: SJL)
• Rydex ExpressShares 2x S&P MidCap 400 ETF(NYSEArca: RMM)

And lastly, there are mid-cap ETFs that utilize financial ratios to beat popular indexes:

• RevenueShares Mid Cap ETF (NYSEArca: RWK)
• WisdomTree MidCap Dividend ETF(NYSEArca: DON)
• WisdomTree MidCap Earnings ETF(NYSEArca: EZM)

Max Chen contributed to this article.

David Hoffman and Evan Cooper for Investment News report on how certain industry insiders feel about non-traditional ETFs in portfolios. The excellent and informative full webcast can be viewed in Investment News’s archives.

On leveraged and inverse ETFs in general:

John Carr of Carr Schwartz Butterfield: The leveraged funds are on the radar of FINRA, the SEC and many states, so advisors are required to document the performance of the ETF, and prove how the funds are helping out a client’s portfolio. It is up to the advisor to prove why the ETF is suitable and necessary for their clients.

Kathleen Moriarty of Katten Muchin Rosenman: I would really encourage potential investors to at least read the summary portions of the prospectus, because in all of the leveraged and ETF prospectuses now, they give actual examples, either in the front part of the prospectus or in the back, of how the mechanism works. Half of the problem comes from people not understanding how the investment works.

On these ETFs and whether their performance meets expectations:

Paul Schatz, president and CEO of Heritage Capital: For the most part, yes. However, if you really dial down to the double- and triple-leveraged funds, both the long and the shorts got hammered last year because of the compounding effect.

Paul Simon, chief investment officer at Tactical Allocation Group: When you’re going to a two- or three-X, whether it’s an inverse or a leveraged situation with one of these ETFs, they’re inherently going to be more volatile. But in a situation like the last 18 months, where volatility was unprecedented, its a bad mix. It’s the main reason to do your homework, and to be careful. (Do leveraged ETFs actually belong in your portfolio?)

On active ETFs:

Ms. Moriarty: There is no true active ETF yet. And in order to understand this, you need to know a three-second background on how the ETFs started. Basically, the ETFs are very odd kind of mutual fund. The real Holy Grail is to do a non-disclosed actively managed fund. And there are about six different ideas of how to do this. They have been down at the SEC pending review for about two to three years, and I don’t know how much longer that’s going to take. (Will the demad for active management in ETFs grow to mainstream?)

For more stories about active ETFs or leveraged ETFs, visit their respective category pages.

ProShares

ProShares has filed for two new long Treasury bond ETFs. The ETFs are:

• ProShares Ultra 7-10 Year Treasury
• ProShares Ultra 20+ Year Treasury

These new funds are in addition to ProShares’ existing Treasury bond funds, which are  ProShares UltraShort 7-10 Year Treasury (NYSEArca: PST), ProShares Short 20+ Year Treasury (NYSEArca: TBF) and ProShares UltraShort 20+Year treasury (NYSEArca: TBT)

Read the prospectus and be sure to fully understand how leveraged and inverse ETFs work before you buy. They’re very unique products and are not right for everyone. (Read all about how leveraged and inverse ETFs work).

For more stories about new ETFs, visit our new ETF category.

This summer, both FINRA and the Securities and Exchange Commission (SEC) weighed in with their thoughts on these controversial funds and ultimately declared that investors should seek the advice of an investment professional who understands how these funds work. The agencies also took care to note that the ETFs need to be more closely monitored than their plain-vanilla brethren. (Read their statement here).

That’s the end of it, right? Not so fast.

Since then, ProShares was hit with a lawsuit regarding the UltraShort Real Estate (NYSEArca: SRS), while Direxion was hit with a suit that focuses on the performance of the Financial Bear 3X Shares (NYSEArca: FAZ). (How leveraged and inverse ETFs work).

There are two issues at play in these suits:

1. Did the providers give proper disclosure about these funds? Yes, they did. Leveraged and inverse ETF providers have taken care to ensure that investors don’t buy these funds without understanding how they operate. This, coupled with the SEC and FINRA warnings, should do much to mitigate any confusion or misunderstanding.

2. The investors filing these suits were “surprised” by how their funds performed. There has been no shortage of education on these funds. Anyone who has done their due diligence would have found a number of sources to use when evaluating them and enough information to determine whether they were worth the risks they entail.

ETF Database put together a good article explaining the issue of compounding. While compounding can work against investors in highly volatile markets, it can work an investor’s favor at other times. Read on to see how.

ETFs have the ability to  trade intraday, so the price at which they’re bought and sold can deviate from their net asset value (NAV). Esko Mickels for Morningstar says that ETFs have a secondary source of liquidity: designated brokers (also known as “authorized participants”) who are allowed to exchange the underlying basket for units with the fund company. This mechanism limits the impact of large orders, but it also puts the liquidity of the fund in the hands of its underlying investments.

Here are 10 tips for trading ETFs that could help you get the most out of them:

1. Timing the trade: Be careful buying and selling ETF during the first and last 30 minutes of the day. An ETF’s volatility is highest at those times and wide spreads are more common.
2. Exercise caution on volatile days: Volatile days in the market can throw an ETF’s underlying value off of its bid-ask spread, so tread with caution.
3. Limit orders: Use these to define the price you’re willing to pay, thereby limiting your market impact. Read more on limit orders here.
4. Select ETFs with high trading volume: While high volume doesn’t necessarily equal liquidity, it implies that a limit order for a few hundred shares near the current mid-market price should be filled quickly. These also remain closer to their NAV.
5. Trade during an open underlying market: If you are investing in overseas markets, it is best to trade the correlating ETF when the overseas market is open. This avoids any uncertainty.
6. Use a stop-loss: A stop-loss is an automatic sell order that is triggered when an ETF’s price falls to a predetermined threshold. The most common stop-loss is set at a specific price, which allows you to limit losses. A trailing stop-loss ratchets up the stop-loss price as your ETF’s price increases. Read more on stop losses here.
7. Watch the fees: Consider broker fees for every transaction. The more trades you do, the more you are paying in fees, taking away from your gains.
8. Leveraged ETFs: Pay attention to thee funds daily, as they can move in radical directions. These also require re-balancing often, meaning more fees to rack up. More on leveraged and inverse ETFs can be found here.
9. Market makers: Market makers working for the designated brokers add liquidity and help keep the bid-ask near the ETF’s underlying value, so having more is generally desirable.
10. Distribution date: Most ETFs are very tax efficient because their turnover is low. There’s the potential that investors holding some ETFs on the day of record can trigger a capital gains event. More information on taxes and ETFs can be found here.

For more stories about ETF information, visit our ETF 101 category.

Emphasis been added to already-existing disclaimers for ProFunds ETFs, a direct response to regulatory overhaul and heightened attention. Joe Morris of Ignites reports that the firm now warns that the funds’ magnified performance targets are daily, not longer-term. This means that returns will likely rise or fall out of proportion with the underlying index over time, according to the filing with the Securities and Exchange Commission (SEC).

The disclaimer also notes that heightened market volatility can be a factor in the overall benchmark’s performance. It also says that  the funds should be used by knowledgeable investors who seek a daily leveraged investment result, and these investors should understand the potential implications of seeking these results.

State and federal regulators have been increasingly broaching concerns about the appropriateness of these funds for average investors, while providers are working hard to get the message out about their funds so investors can better understand them.

For more stories about leveraged or inverse ETFs, visit our long-short ETF category.