If you’re looking for a more sophisticated investment play on broad market exchanges, you may consider Barclays‘ 11 new leveraged exchange traded notes (ETNs), launched under the iPath brand.
The funds provide long and short leveraged returns based on equity indexes like the Russell 1000 and 2000, S&P 500, MSCI EAFE, MSCI Emerging Markets and S&P 500 VIX mid-term futures, writes Joe Morris for Ignites. According to the prospectus, the iPath products recalculate indicative values “on an ongoing basis,” or every 15 seconds during the trading day. [New Leveraged ETNs Offer Innovation.]
Barclays’ new line attempts to fix what many believe to be a flaw in the leverage exchange traded fund (ETF) design, comments Dan Caplinger for The Motley Fool.
Leveraged ETFs were made to reflect bullish or bearish multiple returns on daily movements of market indexes. However, investors who held onto the funds for longer periods found that their returns would lag the benchmark because of compounding. In volatile markets, this effect is more pronounced.
The problem seems to be that investors want a leveraged product that would perform like the name entails over the long term. That’s where Barclays’ new ETNs come into play. The new funds provide long-term investors with bullish or bearish investments on popular indexes. [Leveraged ETFs Regain Interest.]
There are some risks here. If short-term interest rates increase, the notes may lose value, even if the underlying index of the note does well. Since leverage borrows money, if interest rates increase, the leverage costs more to borrow. Additionally, ETN investors are subject to credit risk of the issuing bank.
These funds are an interesting idea that may be appealing to investors vexed by compounding, and we’ll be watching to see if this is indeed how they operate.
For more information on leveraged funds, visit our leveraged ETFs category.
Max Chen contributed to this article.