Now Is The Season To: June 2011

Published on by on June 1, 2011

Consider Spread ETFs

The evolution of the ETF industry continues to expand the line-up of trading strategies available to investors by bringing forth liquid securities that span across a multitude of asset classes and investment strategies. This month were excited to cover a new breed of “spread” ETFs, and while spread trading has been popular amongst sophisticated investors and hedge funds for a while, the strategy has only recently become available in an ETF wrapper. Spread trading is a strategy which requires the investor to simultaneously hold both a long (bullish) and short (bearish) position. Spread traders seek a profit based on the difference in return between two market segments. What makes spread trading attractive is the simple notion that you have the potential to profit from an increasing performance spread between the two assets, even if both are trending downward. This trading strategy is commonly executed using a pair of futures contracts, stocks, options, and/or ETFs, and now can be done in one position with the new FactorShares funds.

Spread ETFs can be used to establish “market neutral” portfolios that may profit if certain indexes and/or assets outperform others. For example, an investor who isn’t sure of the direction of the markets, but is confident that Gold will outperform the S&P 500 can now implement this strategy by simply buying shares of the FactorShares 2X Gold Bull/S&P500 Bear ETF (FSG). Previously, investors had to suffer hefty commissions in order to implement a high-frequency spread trading strategy since they were required to simultaneously hold two separate positions. Management fees are set at 0.75%, above the average for the ETF industry. However, it should be noted that FactorShares ETFs are considerably cheaper than most 2x and even 3x ETFs, most of which charge 0.95%.

Below we have profiled the five recently launched funds, all of which are 2x leveraged:

  • FactorShares 2X: S&P500 Bull/TBond Bear (FSE) is a leveraged spread ETF designed for investors who believe large-cap U.S. equities will increase in value relative to long-dated U.S. Treasuries in one day or less.  FSE seeks to track approximately +200% of the daily return of the S&P U.S. Equity Risk Premium Total Return Index (before fees and expenses) by primarily establishing 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.
  • FactorShares 2X: TBond Bull/S&P500 Bear (FSA) is a leveraged spread ETF designed for investors who believe long-dated U.S. Treasuries will increase in value relative to large-cap U.S. equities in one day or less.
  • FactorShares 2X: S&P500 Bull/USD Bear (FSU) is a leveraged spread ETF designed for investors who believe large-cap U.S. equities will increase in value relative to the international value of the U.S. Dollar in one day or less.
  • FactorShares 2X: Oil Bull/S&P500 Bear (FOL) is a leveraged spread ETF designed for investors who believe crude oil will increase in value relative to large-cap U.S. equities in one day or less.  .
  • FactorShares 2X: Gold Bull/S&P500 Bear (FSG) is a leveraged spread ETF designed for investors who believe gold will increase in value relative to large-cap U.S. equities in one day or less.

Investors need to keep in mind that leveraged ETFs are not suitable for everyone as they carry unique risks and often times require careful active management of open positions [Visit Our Leveraged ETF Center]. Each of the FactorShares products targets a leverage ratio of approximately 4:1 upon daily rebalancing since each dollar invested provides approximately two dollars of long exposure to one benchmark futures contract and two dollars of short exposure to another benchmark futures contract. Prior to rebalancing however, the leverage ratio could be higher or lower than 4:1. In addition to the inherent shortcomings of leveraged products, each FactorShares ETF is rebalanced daily, which further contributes to volatility when held for multiple sessions.

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FactorShares 2X: Gold Bull/S&P500 Bear (FSG) is a leveraged spread ETF designed for investors who believe gold will increase in value relative to large-cap U.S. equities in one day or less.  FSG seeks to track approximately +200% of the daily return of the S&P Gold – Equity Spread Total Return Index (before fees and expenses) by primarily establishing a leveraged long position in Gold Futures and a leveraged short position in the E-mini S&P 500 Stock Price Index™ Futures.