ETNs or ETFs?
Up until the ProShares launch, exchange-traded notes (ETNs) were the only way to obtain leveraged and short exposure to commodities. (Of course, without shorting or leveraging them yourself via a futures brokerage account.) The 19 commodities-focused PowerShares/Deutsche Bank ETNs were really the only game in town, but not anymore.
Instead of using the PowerShares DB Crude Oil Double Long ETN (NYSEArca: DXO - News), now investors can use the ProShares Ultra DJ-AIG Crude Oil (NYSEArca: UCO - News). Both investment products have the same investment strategy of trying to double the daily upside performance of crude's move by 200%. However, UCO does not carry any credit default risk like DXO.
The annual fees on the PowerShares/Deutsche Bank ETNs are a lower 0.75% versus the 0.95% for the ProShares leveraged/short commodity ETFs, but don't overlook the other important details.
For an additional 0.20% in annual costs, the ProShares ETFs do not carry any issuer credit risk. The fall of Lehman Brothers and the subsequent collapse of the company's three ETN products was a nasty real-life lesson about the danger of credit default risk. Clearly, all of the other benefits of ETNs like their lack of tracking error and their favorable tax treatment (which is being reviewed by the IRS and could end at any moment) are completely undermined by ETN credit risk. What good are all of these benefits, with the chronic threat of corporate failure? For that reason, we have consistently warned our readers about the danger of ETNs.
NOW WHAT DO WE DO :shrug:
