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3 Replies
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Valued Contributor

Re: Leveraged ETP Closures - 30 So Far


@yogibearbull wrote:

https://www.etf.com/sections/features-and-news/leveraged-etf-closures-piling


Although a good summary of what's happened over the last month, the devil is in the details.  For example, although some ETNs do offer 'daily' leverage reset, others offer monthly reset, while most deleverage whenever mandatory gov regs kick in.  Then, although that's reflected in what's called the Indicative Value, the leveraged products themselves usually trade at a discount, or premium, to that Indicative Value.  Then, the mandatory trigger, usually $5/unit, comes into play whenever the actual unit price, not Indicative Value, closes below the trigger.  The unit can trade below the trigger all day long and/or the Indicative Value can trade or close anywhere, with no effect on anything.

The Indicative Value can get to zero, and stay there.  That happens whenever the value of the investment is the same as, or lower, than the amount owed to the bank for the leverage.  Just like a margin account.  Then, in at least 1 instance that I am keenly aware of, the Indicative Value of an ETN, REML, the 2X leveraged equivalent of MORL and MRRL can get to zero, stay there, while the note itself continues to trade.  Credit Suisse, who offers REML, which is based upon the IShares unleveraged MREIT ETF REM, modified their prospectus defined calculation of the Indicative Value, which stayed at zero, to something that reflects its current trading value, which has been below $5 all week.  Credit Suisse, unlike UBS, has no $5 mandatory redemption trigger for REML, although it does, or did, for its MLP based note, AMJL.

Finally, this carnage isn't limited to leveraged ETF/ETNs.  Several MLP based CEFs have closed, but  I don't have a list of those.

In general, ifn you don't understand leverage, or its close cousin, margin, don't use it.  If you DO use either, prepare for a REAL roller coaster by buying 2X leveraged products in a margin account.  Even then, there were quirks.  Firstrade allowed me to use margin whenever purchasing MORL, the old Series A ETN but not MRRL, the financially equivalent Series B note!  8-)

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Explorer ○○○

Re: Leveraged ETP Closures - 30 So Far

I don't pretend fully to understand these investments, but quite how so many have managed to survive this long bull market is curious. Inverse of oil has certainly been volatile, and the word is ETNs are to be avoided. Some plain vanilla inverse funds on say S&P seem to track the index inversely pretty well, so there may be good and bad. A tiny experimental exposure with a trailing stop loss is probably the way to go for the curious. I would imagine they are not as liquid as their inverse counterparts. Many seem to have arisen during the credit crisis possibly posing as an alternative to investors who don't have the inclination to play the futures or options markets. This is an accredited investor space for sure, and the maxim 'too good to be true' should be uppermost.

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Explorer ○

Re: Leveraged ETP Closures - 30 So Far


@ElLobo wrote:

@yogibearbull wrote:

https://www.etf.com/sections/features-and-news/leveraged-etf-closures-piling


 

In general, ifn you don't understand leverage, or its close cousin, margin, don't use it.  If you DO use either, prepare for a REAL roller coaster by buying 2X leveraged products in a margin account.  Even then, there were quirks.  Firstrade allowed me to use margin whenever purchasing MORL, the old Series A ETN but not MRRL, the financially equivalent Series B note!  8-)


That's a dereliction of duty by Firstrade.  I can't envision ever thinking that is a sound idea as a "retail" investor.  

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