The four ETFs, which have been listed on the London Stock Exchange (LSE), enable investors to implement daily double-long or double-short positions in UK Gilts and US Treasuries for the purposes of short-term tactical trading or hedging.
Commenting on the launch, Manooj Mistry, head of db X-trackers for the UK, said: “These are easy-to-trade instruments for financially sophisticated institutional investors who want to take tactical leveraged or short positions on sovereign bond markets but do not necessarily have the infrastructure to use derivatives. They are the first of their kind to be launched in Europe.”
The daily double-leveraged long ETFs aim to provide twice the performance of the underlying long index minus a financing component, with daily re-balancing. The daily double-leveraged short ETFs aim to provide twice the performance of a short position in the underlying long index, plus a money market component, with daily rebalancing.
db X-trackers II US Treasuries Double Long Daily ETF
db X-trackers II US Treasuries Double Short Daily ETF
db X-trackers II UK Gilts Double Long Daily ETF
db X-trackers II UK Gilts Double Short Daily ETF
– Provides 2x leveraged long/short exposure to
– Effective within a short-term hedging strategy or
– Collateralised swap-based replication, with full
– UCITS IV compliant, London listed, eligible for
(Exchange codes/tickers below)
The underlying indices for the funds are the Deutsche Bank GBP Gilts Total Return Index and the Deutsche Bank US Treasuries Total Return Index. Importantly, unlike government bond futures, which typically provide exposure to just one point on the yield curve, these indices reflect bonds right across the full range of the curve.
“Bond futures contracts often represent exposure to only one specific point of the yield curve. The new ETFs will be useful for investors who want to take a view on the entire bond market,” said Mistry. “This is especially the case for UK Gilts, where we estimate around 40% of the market is not covered by liquid futures. These products are a liquid way to access this portion of the market.”
Risk on, Risk off
With markets gyrating between “risk on” and “risk off” modes and volatility at its highest level for the year so far, these ETFs, bearing in mind their leveraged nature, which accentuates market moves, will be volatile. However, for sophisticated investors with high-conviction tactical views, the funds could provide an efficient way to express that conviction over the short-term. Equally, the funds could be used to hedge existing exposures and help dampen overall portfolio volatility.
From a trading perspective, the double-leveraged long ETFs are likely be favoured by investors anticipating shifts into “risk off” mode, perhaps in response to further uncertainty relating to the ongoing European sovereign debt crisis. In addition, as well as reflecting demand for “safe havens”, the long funds are likely to react positively to any announcements that signal meaningful extensions to quantitative easing (QE) – central bank government bond buying – programmes in either the US or UK.
Conversely, the double-leveraged short ETFs behave in an inverse manner. These funds are likely to be favoured by investors anticipating signs of improvement in the state of the economy, which typically precede a shift into “risk on” mode and a corresponding de-allocation from safe-haven government bonds. Similarly, any sign of a cessation or suspension of QE – and thus an increase in market interest rates – will likely cause these funds to spike.
Government bonds seen as overvalued
The double-leveraged short funds will also prove attractive to investors wishing to express a short-term conviction view on valuation fundamentals, especially as many investors now view government bonds (particularly those of the US and UK) as overvalued. Indeed, government bonds are considered the most overvalued asset class relative to fair value on a one-year time horizon, according to the latest (April 2012) CFA UK Valuations Index, which showed that 78% of respondents viewed government bonds as overvalued.
Will Goodhart, chief executive of CFA UK, said: “Investment professionals were already concerned about the valuations of government bond markets at the beginning of the year, and their concerns have increased over the last quarter. While fixed income securities have been attractive on account of their perceived “safe haven” status, our survey suggests that they may no longer offer good value relative to other assets on a 12 month time horizon.” If this view turns out to be true, the double-leveraged short ETFs could post some decent performance numbers.
The ETFs complement the previously launched db X-trackers UK Gilts Short Daily ETF, and the db X-trackers US Treasuries Short Daily ETF, which provide unleveraged short exposure to the UK and US sovereign debt markets, respectively. For investors seeking, conventional unleveraged long exposure to UK or US governments there are a range of ETFs available from a number of providers, including iShares, Lyxor, Credit Suisse and Amundi. Amundi, as well offering long funds, also has a range of ETFs offering short exposure to US Treasures.
db X-trackers II US Treasuries Double Long Daily ETF (XUTL)
db X-trackers II US Treasuries Double Short Daily ETF (XUDS)
db X-trackers II UK Gilts Double Long Daily ETF (XULL)
db X-trackers II UK Gilts Double Short Daily ETF (XUSS)
These funds are aimed at sophisticated professional investors. Investors should ensure that they fully understand the mechanics of these products and the effects of leverage before considering an investment.