Comments on: How the new ETN+ Notes can catch investors off guard

By: Jordan

Jordan — Thu, 28 Jan 2010 08:55:37 +0000

Preet I just stumbled onto this other solution for leveraged broad market bull/bear speculation that are called “MacroShares” from Robert Shiller.

Maybe it’s old news, because the few ETFs that used this strategy never took off and eventually closed down, but it sounds like it’s fundamentally a better mouse trap.

The strategy sounds better then normal leveraged ETFs because it will continue to track the market beyond the near term, and it doesn’t have credit risk or hidden counter party risks like these ETNs.

By: Dan

Dan — Thu, 03 Dec 2009 23:51:47 +0000

What happens with the dividends that a S&P500 tracking ETF like SPY would pay. I can’t imagine that there would be a yield, but would the dividends be accounted for in the movement of the ETN, or does the ETN just track the movement of the index? The treatment of the dividends really determines the attractiveness for me. I would be glad to invest in this if it gave me 3 times the return of the S&P500, including dividends. If not, I’d rather lever up with the SPY using borrowed money (which I can borrow for about 1.61% using Interactive Brokers).

By: Michael James

Michael James — Wed, 02 Dec 2009 16:49:35 +0000

It sounds like the ETN+ is quite similar to leveraged investing, unless I’m missing something. The difference seems to be that with leveraged investing you pay the interest periodically rather than letting it sit and compound in the ETN+. In principal these two should work out about the same if when buying the ETN+ you take the money that you would otherwise be paying for a leverage loan and invest it in short-term government debt. I can certainly see that most people wouldn’t do this and probably wouldn’t understand that they are losing interest on a debt that is snowballing within the ETN+. Is there some other factor at play here in the comparison of the two approaches?

By: Cam Birch

Cam Birch — Wed, 02 Dec 2009 16:33:07 +0000

Very interesting. Not something that you normally think about with investing [compound interest]. This is really something that would always be working against you in leveraged investing even when you don’t see it happening directly. Paying an interest bill before you have cashed out your investment has the exact same effect, except you don’t have a different company telling you that the effect is there.

One really interesting question is if this is more cost effective than self arranged leverage especially after tax considerations are taken into effect. Also it would be interesting to know if interest costs can be used to write down your taxes even in this scenario.

Leveraged investing is exceedingly risky, huge upsides (12% ~ 200% gains :) ) and massive downsides (interest and standard stock market risk). What is always important to determine is the factors that add more risk and if there are factors that mitigate risk. Especially when compared to standard investing, leveraged ETFs and self arranged leveraged investing. This is certainly starting to look like a good product with pretty much the expected risks that the product provides (unlike leveraged ETFs with the decay factor).