CHICAGO, June 27, 2012 /PRNewswire/ -- Funds in this article include: iPath Long Enhanced MSCI EAFE Index ETN (MFLA), Direxion Daily Developed Markets Bull 3x Shares (DZK), ProShares Ultra MSCI EAFE Index Fund (EFO). Eric Dutram looks at what he considers to be the worst Exchange-Traded Product on the market and how investors can avoid its issues with other funds.
Is MFLA The Worst ETF In The World? written by Eric Dutram of Zacks Investment Research:
The ETF industry has been booming over the past few years. Now, there are close to 1,500 exchange-traded products in the market place with 50 sponsors and over a trillion dollars in AUM.
Total fund launches have already breached the 100 product barrier for 2012 while assets have increased by almost $100 billion in the same time frame. New products are now in almost every conceivable industry, giving investors exposure to a number of market segments including 'crossover bonds', cloud computing, and small cap Singaporean stocks.
While many of these products have been welcomed additions to the market, there are several that have failed to catch on with investors or are just downright strange.
Sometimes, fund issuers stretch too far in their efforts to capture assets and we are left with the results of poorly thought out products that are unable to gain any level of traction in the market (see ETFs vs. ETNs: What's The Difference?).
One such example of this phenomenon is arguably with the case of the iPath Long Enhanced MSCI EAFE Index ETN (MFLA), a note that is arguably one of the worst in the American market at this time. While this might seem like a bold claim at first glance, the product certainly has a host of issues that have kept investors away so far, and look to repel ones in the future as well.
Below, we discuss the reasons for why this iPath note should be avoided and how it has become one of the most undesirable products in the broad ETP market today:
This product offers a leveraged return on the performance of the MSCI EAFE Net Total Return Index which is a free float-adjusted market capitalization benchmark that seeks to provide exposure to over 20 developed markets from around the globe. While this may sound promising, and even very useful to a number of traders and hedgers, the actual execution has made the note more or less untradeable for many investors.
First, investors should note that the product is structured as an ETN instead of an ETF. This means that the product faces credit risk from the underlying issuer, Barclays. This implies that if Barclays goes belly-up investors may not receive their full capital back on their investment, although this possibility is relatively remote.
Still, it is a risk nonetheless, and it is one that investors who purchase ETFs do not have to deal with at all. Furthermore, since it is a debt security, the MFLA does expire—11/30/2020—so some investors may be put off by this issue as well (read ETF Investors: Beware The Coming ETN Backlash).
Beyond this problem, which is relatively minor, there is also the issue of the ETN's participation rate. According to the iPath website, the current participation rate for MFLA is roughly 2.2.
This means that the note, for investors who buy in now, are not getting a 2x leverage rate but instead are getting a 2.2x rate of leverage. This is because, unlike most leveraged ETPs, MFLA does not ever rebalance, a situation that can allow divergences from the 2.0 leverage rate to develop over time.
For the rest of this ETF article, please visit Zacks.com at: http://www.zacks.com/stock/news/77707/is-mfla-the-worst-etf-in-the-world
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