Leveraged Extended ETNs?

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Leveraged Extended ETNs?

Post by gopercy01 » Sun Mar 24, 2013 3:24 pm

I came across these leveraged ETNs and I wanted to get some opinions about them. The symbols I'm looking at are BXUC and SFLA. Both of their goals are to utilize leverage to amplify the return of the S&P 500 on a long term basis. These are not similar to funds such as SSO, that use leveraged to amplify the S&P 500's return on a daily basis. I know funds like SSO are not intended to be held for an extended period of time due to leverage decay.

I'm looking at this from a long term, buy and hold standpoint. I've got plenty of time until I will need this money, so I am more open to the risk that BXUC and SFLA contain. I've got a fairly well diversified portfolio already, and this is just going to be a part of my portfolio.

Let's say I've got $10,000 that I want to devote to this investment strategy. One thought that has come across my mind is to invest $5,000 in one of the leveraged extended funds, BXUC or SFLA, and $5,000 in a safe investment, such as a bond or treasury note. I've run some sample scenarios, and it seems to me that this will almost always ensure that the return on my investment is greater than the return on the S&P 500.

For instance, let's look at 3 scenarios.

1) S&P is up 10%
2) S&P is down 10%
3) S&P is flat

Let's assume the return on the bond is 2% guaranteed and the leveraged funds are leveraged at 2x.

1) $5,000(1.2) + $5,000(1.02) = $11,100 total return = ($11,100 - $10,000) / $10,000 = 11%
2) $5,000(0.8) + $5,000(1.02) = $9,100 total return = ($9,100 - $10,000) / $10,000 = -9%
3) $5,000(1) + $5,000(1.02) = $10,100 total return = ($10,100 - $10,000) / $10,000 = 0.1%

It seems like I would come out in front of the S&P in all scenarios. If I decide to invest in these ETNs, I may or may not follow this strategy. Since this is only a part of my portfolio, I may put a larger percentage towards the ETNs so I would take more advantage of the leverage.

I'd love to get some opinions on this, thanks!

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Re: Leveraged Extended ETNs?

Post by pkcrafter » Sun Mar 24, 2013 5:22 pm

ETNs aren't recommended by Bogleheads, and leveraged ones are a terrible idea.

http://dealbook.nytimes.com/2012/03/29/ ... ded-notes/


When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: Leveraged Extended ETNs?

Post by gopercy01 » Sun Mar 24, 2013 8:01 pm

Hi Paul, thanks for the info, that was pretty eye opening. I guess I didn't really understand what an ETN was. So just to be clear, ETNs don't actually hold the assets of the index that they are tracking? How does that work?

Also, since they are unsecured debt securities, if the issuing bank defaults, then there is a chance that the ETN holders will not be compensated for the value of their holdings, correct?

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