New ETN Product Hits The Market: Should You Buy The New 3x Leveraged US Dollar ETNs?

| June 8, 2011 | 0 Comments

With volatility comes opportunity.  It’s the way of Wall Street.  And we’ve seen extreme volatility in the marketplace since the new millennium.

We had the tech bubble, the commodity bubble, the equity bubble, and the housing bubble.  And now the latest bubble is in currencies.

Just look at the decline in the US Dollar over the past year…

It’s dropped over 17% in that time.  A move in a currency so large is simply unheard of.  And this kind of overextended selling is creating a bubble in other currencies.  Even Jean-Claude Juncker, chairman of the EuroZone finance ministers, just said the Euro was overvalued compared to other major currencies.

Traders can smell blood in the streets and they’re capitalizing on it.   We’re certain to see speculative trading ahead for the US Dollar… you can count on it.

So leave it up to Deutsche Bank and Invesco PowerShares to team up and give us yet another product to get in on the action.

And they’re offering two high powered ETNs for you to capitalize on dramatic swings in the greenback.

But are their latest offerings just a risky gamble?

I’ll tell you what I think in a moment, but first, let me fill you in on the products.

PowerShares two new ETNs are based on the US Dollar.  They are the PowerShares DB 3x Long US Dollar Index Futures ETN (UUPT) and the PowerShares DB 3x Short US Dollar Index Futures ETN (UDNT).

These ETNs are triple leveraged, meaning they’ll have a daily move three times as much as the US Dollar… up or down.  And this makes them perfect for day traders looking to capitalize on short term trades.  There’s a bit more detail I’m skipping, but the bottom line is they’ll move along with the US Dollar.

While getting triple the action on the US Dollar movement sounds sexy, these ETNs carry more risk than you initially see.

First, while you can triple your gains when you’re right… you’ll triple your losses if you’re not.  Currencies move fast and furious… so you’ll really feel it if you’re on the wrong side of the US Dollar trade!

Second, the investment is an ETN, not an ETF…

When you buy an ETF, you get shares in the exchange traded fund.  Not so for an ETN.  The issuer is giving you a note, not equity shares. And that means ETNs carry a credit risk.

If the issuer of the security goes under, you lose your entire principal investment.  This is where Deutsche Bank comes in.  They’re providing backing for the note you’ll hold.  While there’s no expectation Deutsche Bank will be going belly up any time soon… you never know!

Third, these ETNs are brand new and have yet to build a solid track record…

Since these funds started trading just a couple of weeks ago, we have no idea how well they’ll perform.  They have yet to prove if they can really track the performance of the US Dollar, at triple the return, on a daily basis.

Since they’re brand new funds, they trade on light volume.  For example, UDNT had a volume of 6,653 on June 2nd.  And the ETN UDN, for example, had volume of 132,629 on the same day!

While it doesn’t present a problem for most investors, if you wanted to move a big trade in or out of the funds, you might have some problems.

So should you trade these in your own account?

For most investors, I say “No Way”!

While triple leveraged investments may be sexy, they’re not for everyone…

I’d only recommend a triple leveraged ETN for very active and experienced day traders.  These ETNs are excellent tools for maximizing your intra-day calls on the US Dollar’s movement.

But that’s where my recommendation ends…

Unless you fall into the category of a very active and experienced day trader, you’ll do yourself a favor by staying away from these two new high-flying ETN products.

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Category: ETFs

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