Direxion Introduces More Triple-Leveraged (3X) Index ETFs

DirexionShares has already expanded its nascent stable of 3X ETF stallions.  The initial crop of triple-levered trading vehicles tied to indices of financials, energy, and large and small cap stocks, have proven to be widely popular, as evidenced by daily trading volumes in the millions.  For junkies who need a fix that plain old 200% leverage just can't cure, the doctor now has a larger cabinet of 300% smack.  Traders can now get 3X returns bull or bear in technology (TYH, TYP), emerging markets (EDC, EDZ), and developed markets (DZK, DPK).  We have seen the future of leveraged ETFs, and it was foreshadowed by the Mach3 razor.

One thing to keep in mind with these ETFs is that they only ATTEMPT to replicate 300% of the move of the underlying index, and through complicated means.  The higher the leverage goal, the more the tracking error gets magnified. 

ETF vs. ETN: Choosing the Right Leveraged Play on Gold and Oil

There was an excellent article by Ron DeLegge of ETFguide.com a few weeks ago about the pros and cons of ETFs vs. ETNs.  The comparison is topical because if you want to make a leveraged play on gold or crude oil, you now have a choice between Powershares ETNs and ProShares ETFs.  Until a few weeks ago, the ETNs were the only way to go.  For most, ETFs are the better option because they don't have the credit default risks of ETNs.  Manic traders might prefer the increased liquidity and comparable tax advantage (for now) of ETNs. Some of the new ETFs still have very low trading volumes.  

The new commodity ETFs linked in the sidebar are the 2X UltraLONG UCO (oil), UGL (gold), and AGQ (silver), and the 2X UltraSHORT SCO (oil), GLL (gold), and ZSL (silver).  Keep liquidity in mind.  

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ETNs or ETFs?

Up until the ProShares launch, exchange-traded notes (ETNs) were the only way to obtain leveraged and short exposure to commodities. (Of course, without shorting or leveraging them yourself via a futures brokerage account.) The 19 commodities-focused PowerShares/Deutsche Bank ETNs were really the only game in town, but not anymore.

Instead of using the PowerShares DB Crude Oil Double Long ETN (DXO), now investors can use the ProShares Ultra DJ-AIG Crude Oil (UCO). Both investment products have the same investment strategy of trying to double the daily upside performance of crude's move by 200%. However, UCO does not carry any credit default risk like DXO.

The annual fees on the PowerShares/Deutsche Bank ETNs are a lower 0.75% versus the 0.95% for the ProShares leveraged/short commodity ETFs, but don't overlook the other important details.                             

For an additional 0.20% in annual costs, the ProShares ETFs do not carry any issuer credit risk. The fall of Lehman Brothers and the subsequent collapse of the company's three ETN products was a nasty real-life lesson about the danger of credit default risk. Clearly, all of the other benefits of ETNs like their lack of tracking error and their favorable tax treatment (which is being reviewed by the IRS and could end at any moment) are completely undermined by ETN credit risk. What good are all of these benefits, with the chronic threat of corporate failure? For that reason, we have consistently warned our readers about the danger of ETNs.

The Obscure Product Structures behind Commodity ETFs

Most commodities focused ETFs follow a grantor trust or partnership product structure and are not registered under the Investment Company Act of 1940 like most equity and bond funds. Instead, many are registered under the Securities Act of 1933.

One such example is the SPDR Gold Trust (GLD). With almost $20 billion in assets, GLD is the most popular single commodity ETF. GLD follows a grantor trust product structure and its share price is hinged to one-tenth the ounce price of gold bullion. Also, GLD does not use gold commodity futures, but holds physical gold bars in a secured vault.

Since many commodities ETFs don't own the physical commodities, but instead futures or options on them, their tax treatment is quite different compared to a stock or bond ETF. Gains and losses in commodity ETFs that use futures contracts are taxed as 60% long-term and 40% short-term. This creates a blended tax rate ceiling of 23% for investors in the highest tax bracket.

As we've mentioned before, the ideal place for commodity ETFs is inside a tax sheltered account like an IRA, ROTH IRA, or 401(k) plan. Simply put, they aren't very tax efficient held elsewhere.

Merry Christmas!

Ruble Getting Whacked on Dollar Bounce, Crude Weakness

The inexorable decline in oil prices continues to pressure Russia's foreign currency reserves in defense of the ruble.  Check the chart in the "Russia Watch" sidebar -->

Nymex 3-2-1 Crack Spreads Widen

Crude oil has fallen much more than RBOB gasoline and heating oil this week. Refiners had a decent day yesterday as VLO announced further production cuts.  Little guys like WNR, TSO, HOC, and ALJ will benefit, not only from less distillates being cracked, but also from the lower borrowing costs associated with cheaper crude, which was killing them on the rise up over $100, despite gasoline reaching record levels.

Obama to Nominate Schapiro for SEC Head; Cox to Be Flayed

FINRA chief Mary Schapiro will get the nod from President-elect Obama for Chairwoman of the SEC.  Outgoing Chairman Christopher Cox was already getting chafed for changing the uptick rule, being soft on naked shorting, and basically lubricating the bear market, but the recent Madoff scandal highlights just how limp the regulatory sinews have become.