FactorShares, a new entrant to the ETF industry, has launched a suite of leveraged products designed to offer investors exposure to the differentials in daily returns between various asset classes. The new leveraged funds will give investors an opportunity to bet that one asset class will increase in value relative to another over a single trading session, providing tools to bet on the relative performance of large cap U.S. stocks, long-dated Treasuries, the U.S. dollar, gold, and crude oil. Each of the FactorShares products will offer leveraged exposure to two asset classes–one long and one short position. The five FactorShares products launching today include:
- 2x S&P 500 Bull/T-Bond Bear (FSE): Designed for investors who believe the large-cap U.S. equity market segment will increase in value relative to the long-dated U.S. Treasury market segment over the next day. This fund will offer 200% daily leveraged exposure to the spread between large cap U.S. equities and Treasuries, through a leveraged long position in the E-mini S&P 500 Stock Price Index futures and a leveraged short position in the U.S. Treasury Bond futures [see FSE fact sheet].
- 2x T-Bond Bull/S&P 500 Bear (FSA): This fund is the counterpart to FSE, offering an opportunity to play outperformance of long-dated Treasuries relative to large cap U.S. stocks. This fund takes a short position in E-mini futures and long position in Treasury Bond futures [see FSA fact sheet].
- 2x S&P 500 Bull/USD Bear (FSU): This fund is designed for investors who believe that large cap stocks will increase in value relative to the general indication of the international value of the U.S. dollar, taking a long position in E-mini contracts and a short position in U.S. Dollar Index futures. The currency futures contract is weighted heavily towards the euro (which makes up more than 50% of the underlying exposure), with additional exposure to the Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc (PowerShares’ UUP and UDN offer exposure to the same index). [see FSU fact sheet]
- 2x Oil Bull/S&P 500 Bear (FOL): This fund is designed to profit when oil outperforms large cap stocks, offering leveraged exposure to an index that includes a long position in oil futures that offer exposure to light sweet crude oil and a short position in E-mini futures [see FOL fact sheet].
- 2x Gold Bull/S&P 500 Bear (FSG): Designed to capture the spread between gold and large cap stocks on a daily basis, FSG maintains a long position in gold futures and a short position in E-mini futures [see FSG fact sheet].
All of the FactorShares products operate with a daily reset of the leverage, meaning that they are designed to offer the specified amplification target over a single trading session only; investors holding these funds for longer or shorter than a single day may not realize the targeted returns. All of the new ETFs will charge a management fee of 0.75%.
“As a portfolio manager, I used to become frustrated about being charged twice the transaction fees and double the margin requirements in order to implement spread trades,” explained Stuart Rosenthal, CEO and Co-Founder of Factor Advisors. “I was determined to bring greater efficiency to spread trading. With the creation of FactorShares, spread trading among the major asset classes requiring two separate positions and indiscriminate rebalancing is in the past.”
New Breed Of Product
Products offering daily leveraged exposure to large cap stocks, gold, Treasuries, and crude oil have been around for years; ProShares and Direxion each have a number of 2x and 3x options. The FactorShares funds are the first to offer leveraged exposure to an asset class spread on a daily basis, making them unique in that they allow investors to make plays on the relative performances of various indexes. For example, FSU could gain even if the S&P 500 is down–as long as the U.S. dollar index is down by a greater percentage during the trading session (and, of course, vice versa).
It should be noted that leveraging asset class spreads will likely create some volatile products, particularly those that focus on delivering the spreads between asset classes that tend to move in opposite directions. On Tuesday of this week for example, the United States Oil Fund (USO) jumped by 5.9%. The S&P 500 SPDR (SPY) dropped more than 2% during the same session, meaning that the one day spread between the asset classes was close to 8%. Add in leverage on top of that, and achieving double digit gains or losses over a single period is certainly possible.
The FactorShares ETFs can be traded commission free on the Interactive Brokers platform.
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Disclosure: No positions at time of writing.