VelocityShares Debuts Leveraged Precious Metals ETNs

by on October 18, 2011 | ETFs Mentioned:

VelocityShares, the issuer behind several popular ETNs linked to volatility-based indexes, made a big expansion to its product lineup this week with the launch of eight notes offering leveraged exposure to various precious metals. The new additions include both long and inverse offerings covering gold (3x), silver (3x), platinum (2x), and palladium (2x).

Each of the new products is a first-to-market offering; the gold and silver ETNs represent the fist time 3x daily exposure has been available to those metals, while the platinum and palladium products are the first to offer leveraged or inverse exposure to those metals [for analysis of all new ETFs, sign up for the free ETFdb newsletter]:

Ticker ETF Index
UGLD 3x Long Gold ETN S&P GSCI Gold Index (300%)
DGLD 3x Inverse Gold ETN S&P GSCI Gold Index (-300%)
USLV 3x Long Silver ETN S&P GSCI Silver Index (300%)
DSLV 3x Inverse Silver ETN S&P GSCI Silver Index (-300%)
LPLT 2x Long Platinum ETN S&P GSCI Platinum Index (200%)
IPLT 2x Inverse Platinum ETN S&P GSCI Platinum Index (-200%)
LPAL 2x Long Palladium ETN S&P GSCI Palladium Index (-200%)
IPAL 2x Inverse Palladium ETN S&P GSCI Palladium Index (-200%)

Each of the new products would maintain a daily reset feature, meaning that the target leverage objective is applicable for a single trading day only. Similar to existing volatility products form VelocityShares, the new products are all structured as exchange-traded notes. That means that they are debt instruments whose value is linked to the performance of an underlying index; as such, investors avoid tracking error that can be a potentially significant concern in leveraged futures-based strategies, but are exposed to the credit risk of the issuing institution (in this case, Credit Suisse).

Many investors have embraced ETNs as a more efficient way to establish access to commodities. Because the indicative value of the notes is calculated based on changes in an index, ETNs won’t incur tracking error. For futures-based strategies that employ leverage, tracking error–the difference between a fund’s performance and the change in the underlying index–can become significant over time. Moreover, ETNs don’t generate K-1s for investors, allowing for the avoidance of what some see as an undesirable administrative hassle. Many commodity ETPs are structured as partnerships, meaning that investors in those products may receive a K-1 at the end of the year detailing their share of gains or losses in the partnership [see When ETNs Are Better Than ETFs].

Leveraged Precious Metals ETPs

The platinum and palladium products from VelocityShares are the first to offer leveraged exposure to those metals, both of which are used widely in the production of catalytic converters. ETF Securities offers physically-backed platinum (PPLT) and palladium (PALL) ETFs, and iPath offers an ETN (PGM) linked to an index comprised of platinum futures.

There are other exchange-traded products that offer leveraged exposure to gold and silver futures. ProShares offers a pair of 2x daily leveraged ETFs, the Ultra Gold (UGL) and UltraShort Gold (GLL). PowerShares and Deutsche Bank teamed up to offer a pair of 2x monthly leveraged ETNs, including the long DGL and inverse DZZ. And FactorShares offers a 2x Gold Bull / S&P 500 Bear (FSG) that delivers leveraged exposure to the spread between gold prices and returns of the S&P 500. Combined, those five products have assets in the neighborhood of $1.3 billion.

ProShares also offers 2x daily leveraged exposure to silver through AGQ (long) and ZSL (short). Those two funds have aggregate assets of close to $1.2 billion.

The VelocityShares gold and silver products will both offer 3x daily leveraged exposure. The 3x leveraged silver ETNs will charge an annual investor fee of 1.65%; the other six products will charge 1.35% annually.

Disclosure: No positions at time of writing.