Coming Soon: FactorShares’ New Approach to Leveraged ETFs

by on February 18, 2010

FactorShares, a brand new issuer, has submitted five new ETFs for SEC approval in the leveraged ETF space. The new funds include the FactorShares S&P 2x US Equity Premium, FactorShares S&P 2x US Anti-Equity Premium, FactorShares S&P 2x US Equity Anti-USD, FactorShares S&P GSCI 2x Crude Oil Premium, and FactorShares S&P GSCI 2x Gold Premium. Each fund will focus on capturing the spread between the S&P 500 and a certain benchmark, adding a twist to how leveraged ETFs have traditionally operated. The Equity Premium ETF will go long the S&P 500 and use futures to short 30-year Treasury Bonds, positioning it to profit if stocks outperform bonds. For investors who are forecasting a declining equity market and a flight to quality (i.e., Treasuries), the Anti-Equity Premium ETF could become an interesting option: this proposed fund would short the S&P 500 and go long in Treasuries

For investors more concerned with the correlation between the dollar and equity markets, FactorShares will offer the U.S. Equity Anti-USD ETF, which will reflect the difference between S&P 500 futures and a dollar index. For commodity-focused investors, both the Oil and Gold ETFs will go long in their respective commodities and short the S&P 500, potentially offering a way to profit if inflation soars and investors dump equities for hard assets and currency.

The new ETF products offer a unique twist on using leverage in the ETF structure. However, there are some risks that may come along with the strategies outlined by FactorShares. Because the proposed ETFs would implement certain futures-based strategies, contango in futures markets could have an impact on the returns delivered as new contracts are rolled over and purchased (see our recent article on How Contango Impacts ETFs).

Like most existing leveraged ETFs, the proposed funds would have a daily rebalancing strategy, requiring regular monitoring and potentially rebalancing. Finally, the funds will be quite pricey by ETF standards, with the cheapest, the S&P 2x US Equity premium coming in at 1.23% and the most expensive, the S&P GSCI 2x Crude Oil Premium charging 1.34%. Nevertheless, the funds represent an interesting take on a widely segmented sector, allowing investors to further diversify their risks in this choppy and uncertain market.

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Disclosure: No positions at time of writing.