I've been doing some reading tonight on dividend ETF's. One in particular intrigues me: MLPL -- UBS E-TRACS 2x Long Alerian MLP Infr ETN. Not having heard of "leveraged ETF's" previously, I was wondering if anyone could give me some highlights of the risk vs. reward on this type of investment.
I have owned another MLP for almost 3 years, so I do recognize the somewhat more complicated tax treatment.
MLPL Anyone?
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secretwealth
- Posts: 1948
- Joined: Mon Jun 27, 2011 3:31 am
Leveraged ETFs suffer from contango. They are best avoided, but can be good for short-term trades: http://business.financialpost.com/2011/ ... =e67d-fd1f
If you are going to use a leveraged ETF your first question shouldn't be on here and asking, "what is this?" It's one of those products you need to know really well (I do not know well enough), and like others have said it's really a short term play or it would be a hedge for something else...or just a wild gamble.
I asked the question because I ran across an article tonight that listed the top 10 highest yielding dividend ETFs. Most of those listed where in the 4 - 5% range. The levereage ETF - MLPL - yields about double.
I used to have a Series 7 license. My employer at the time did not allow us to offer MLP's to our clients at all. The firm I worked for had a series of bad experiences with them back in the late '70's - 80's.
If they considered MLP's in general risky. I felt sure that leverage ETF MLP's were even worse, but I wanted to get another perspective. That's the beauty of a forum like this. It's a place where people of different backgrounds and experiences gather to share ideas.
But before I dismissed them completely, I thought it best to get another perspective. Thanks.
I used to have a Series 7 license. My employer at the time did not allow us to offer MLP's to our clients at all. The firm I worked for had a series of bad experiences with them back in the late '70's - 80's.
If they considered MLP's in general risky. I felt sure that leverage ETF MLP's were even worse, but I wanted to get another perspective. That's the beauty of a forum like this. It's a place where people of different backgrounds and experiences gather to share ideas.
But before I dismissed them completely, I thought it best to get another perspective. Thanks.
I've got about 5% of my portfolio allocated to infrastructure/mlp's. Of that about 1/3 is mlpl. I've read a lot about why leveraged funds are not suitable for long term investors, but they seem to be warning that you won't get exactly 2x the return of the index because of "volatility drag" and they seem to be warning mostly about the type of leveraged fund/note that resets daily. I'll dig up some links and post later.
Mlpl resets it's leverage back to 2x monthly instead of daily. When I compare it to its 1x cousin on google finance (mlpi) it gets pretty close to 2x the returns (market price and distributions). As some other people have mentioned, because mlpl is an etn instead of an etf, if UBS goes bankrupt, because an etn is unsecured credit, the etn holders might only get some (or no) money back. This is what I see as being the biggest risk of owning it.
I think the contango problem that secret wealth linked to above only applies to futures contracts - there is no cost to store a physical product here like there is with a commodity etf. The problem that applies to leveraged funds specifically is called "volatility drag". The problem arises because the fund has to reset its leverage back to its original 2x every day or month (depending on the fund), and the "buying" or "selling" at different prices will cause the price to drift from exactly 2x the return of the index.
Mlpl resets it's leverage back to 2x monthly instead of daily. When I compare it to its 1x cousin on google finance (mlpi) it gets pretty close to 2x the returns (market price and distributions). As some other people have mentioned, because mlpl is an etn instead of an etf, if UBS goes bankrupt, because an etn is unsecured credit, the etn holders might only get some (or no) money back. This is what I see as being the biggest risk of owning it.
I think the contango problem that secret wealth linked to above only applies to futures contracts - there is no cost to store a physical product here like there is with a commodity etf. The problem that applies to leveraged funds specifically is called "volatility drag". The problem arises because the fund has to reset its leverage back to its original 2x every day or month (depending on the fund), and the "buying" or "selling" at different prices will cause the price to drift from exactly 2x the return of the index.