The Securities and Exchange Commission struck its regulatory hammer on the leveraged and actively managed exchange traded funds (ETFs) that use derivatives, but fund providers are adapting and will soon offer leveraged ETFs structured as “commodity pools.”
An example: Factor Advisors launched a set of five products that utilize a “spread trading” technique, which seeks to replicate a 200% leveraged long position and a 200% leveraged short position in the same fund, writes Jackie Noblett for Ignites. Factor Advisors CEO Stuart Rosenthal commented that “the best source of liquidity for the underlying assets is the futures market, so we’re predominantly using futures for the underlying exposure. The correct structure for the fund, then, is as a commodity pool.”
As a way to circumvent the new SEC regulations on leveraged funds, Factor Advisors structured the funds as commodity pools, which will be subject to registration and disclosure by the Commodity Futures Trading Commission and the National Futures Association. The CFTC does not require commodity pools to register with regulators, but the fund provider does have to provide information on transactions made by the pool.
Direxion is also preparing 10 new leveraged long and short currency ETFs based on commodity pools. Andy O’Rourke, senior VP and head of marketing at Direxion, remarked that “we’re seeking that option because it’s the only one available to us at this time.
When the SEC enacted the moratorium on new derivative-backed and leveraged funds on March 25, 2010, the moratorium basically stopped new entrants in the leveraged and inverse ETF space.
ProShares was the first fund provider to launch four leveraged currency products structured as commodity pools back in November 2008.
For more information on leveraged funds, visit our leveraged ETFs category.
Max Chen contributed to this article.