2 New ETNs Offer Dollar Leverage

05/26/2011 6:00 am EST

Focus: FOREX

Michael Johnston

Co-Founder and Senior Analyst, ETF Database

A pair of newly released exchange traded notes (ETNs) offer investors and traders additional leveraged options for trading the US dollar against major currency counterparts.

PowerShares and Deutsche Bank have rolled out two exchange-traded notes (ETNs) that give investors additional options for expressing their outlook on the performance of the US dollar against its major developed-market rivals.

The two new ETNs are linked to an index that consists of US dollar index futures, which reflect the performance of the greenback against a basket consisting of the euro, yen, pound, franc, Canadian dollar, and Swedish krona. The two new ETNs are:

  1. PowerShares 3x Long US Dollar Index Futures ETN (UUPT): This note will deliver monthly results that correspond to 300% of the change in the futures-based index. UUPT charges an expense ratio of 0.95%.
  2. PowerShares 3x Short US Dollar Index Futures ETN (UDNT): This note will deliver monthly results that correspond to -300% of the change in the futures-based index. UDNT, like UUPT, also charges 95 basis points annually.

PowerShares already offers non-leveraged versions of the US dollar funds, including PowerShares US Dollar Index Bullish Fund (UUP) and PowerShares US Dollar Index Bearish Fund (UDN).

Those funds have become popular tools among investors looking to bet on or against the dollar or to hedge greenback exposure. UUP has about $1.2 billion in assets under management (AUM) while UDN has about $170 million in assets.

Both of those products are structured as commodity pools; the new products are exchange-traded notes, meaning that they are debt securities whose value is linked to the specified index.

See Related: ETNs vs. ETFs: What’s the Difference?

CurrencyChart1

The underlying index is dominated by the euro, which accounts for about half of the portfolio. As such, UUPT and UDNT will exhibit significant sensitivity to movements in the USD/EUR exchange rate, and may be useful tools for investors looking to bet on currency movements.

While the new ETNs don’t offer the degree of leverage that many forex traders employ, they should feature significantly more volatility than UUP and UDN. “We are delighted to provide investors an opportunity to further benefit from Deutsche Bank’s industry-leading foreign exchange platform through exchange-traded products,” said Martin Kremenstein, a Director at Deutsche Bank, in a press release. “These ETNs provide investors additional ways to express a view on the US dollar.”

There are some existing options for investors seeking leveraged exposure to the US dollar, however. ProShares offers a pair of leveraged ETFs focusing on the USD/EUR exchange rate, ProShares UltraShort Euro (EUO) and ProShares Ultra Euro (ULE). Van Eck offers a similar pair of ETNs, The Market Vectors Double Short Euro ETN (DRR) and the Market Vectors Double Long Euro ETN (URR).

All of those products reset exposure on a daily basis; the new products reset exposure monthly, reducing the monitoring and rebalancing requirements for traders.

By Michael Johnston of ETFdb.com

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