UBS Investment Bank (NYSE: AG), the purveyor of the ETRACS exchange traded notes, launched a leveraged S&P 500 ETN that resets its holdings on a monthly basis.
According to a press release, the ETRACS Monthly Reset 2xLeveraged S&P 500 Total Return ETN (NYSEArca: SPLX) began trading Wednesday, March 26.
The ETN tries to reflect the monthly compounded 2x, or 200%, leveraged performance of the S&P 500 Total Return Index.
“The S&P 500 Total Return Index is widely regarded as the best gauge of large cap US equities and a bellwether for the US economy,” Paul Somma, Senior ETRACS Structurer, said in the press release. “SPLX allows investors to get 2x leveraged exposure to this benchmark index by way of a product whose leverage resets monthly and not daily.”
Most leveraged exchange traded funds reset holdings on a daily basis. For instance, the ProShares Ultra S&P500 (NYSEArca: SSO), the largest leveraged ETF with $3.2 billion in assets under management, tries to reflect the 2x daily return of the S&P 500.
Due to the compounding effects, leveraged fund investors may enjoy higher gains in trending markets, such as in 2013, but they must also be willing to accept heavier losses, especially in volatile market conditions. [What Are Leveraged ETFs?]
Compounding can affect leveraged ETFs differently in varying market conditions. For example, in an upward-trending market, compounding can result in long-term returns that are greater than the sum of the individual daily returns, according to ProShares. In a downward-trending market, it can show long-term results that are less negative than the sum of individual daily returns. However, the long-term results are less than the sum of the individual daily returns in volatile market conditions when markets swings are a daily event. [Leveraged ETFs Gain Popularity in Trending Markets]
“Over periods longer than one day, a constant holding in leveraged bull and bear funds can both have negative compound returns because of the amplified volatility drag,” according to Morningstar analyst Michael Rawson. “Avoiding this volatility drag requires daily rebalancing.”
By resetting holdings on a monthly basis, SPLX may more closely track its 2x target during volatile market conditions over longer periods, providing investors more leeway in holding onto the leveraged product. However, the ETN may not fully benefit from the compounding effects during a trending bull market, as compared to leveraged ETFs that rebalance on a daily basis.
For more information on recent launches, visit new ETFs category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.