ProShares, the world's biggest purveyor of leveraged and inverse
funds, today rolled out a double-exposure bull-and-bear pair of
ETFs focused on the Australian dollar, a "commodity currency" whose
fortunes have been closely tied to rising demand for raw materials
from the developing world.
The double-long ProShares Ultra Australian Dollar ETF
(NYSEArca:GDAY) and the double-short ProShares UltraShort
Australian Dollar ETF (NYSEArca:CROC) are commodity pools that
employ currency futures to achieve their objective. Both have
annual expense ratios of 0.95 percent-the cost of most ProShares
products. Their performance is benchmarked to the U.S. dollar price
of the Aussie dollar.
Catchy tickers aside, the closest competitor to the new
ProShares funds is the CurrencyShares Australian Dollar Trust
(NYSEArca:FXA), a grantor trust that owns actual Australia dollars
and has an expense ratio of 0.40 percent. But that comparison
may be a bit of a stretch, as the ProShares products, given how
their leveraging mechanisms work, aren't really designed to be held
over the long term.
In any case, the Australian dollar has benefited from the rise
of China, as Australia's troves of raw materials have been in high
demand. Contrary to much of the developed world, its economy is
relatively robust, a state of affairs made clear by its official
interest rates, which are above 3 percent. By comparison, official
short-term interest rates in the U.S. have been at about nil since
the crash of 2008.
Australia's economy has also been very much tied into the
"risk-on/risk-off" pattern of trading in financial markets over the
past several years, especially in the years since the crash. That
has made Australia's currency volatile at times, as investors shift
money into and out of riskier assets depending on what's going on
in, say, fiscally strapped Europe.
To the extent that such moves in the Aussie dollar are
"tradable," the ProShares products could be seen as suitable tools
to benefit from such swings. That's because, as noted, the
ProShares products are most appropriate for short-term holding
periods, as they are rebalanced daily.
What that means in practice is that the returns of such funds
can diverge significantly from those of their respective indexes,
particularly in volatile and trendless markets.
But as short-term products, the ProShares funds are poised to
take advantage of their tax treatment. All futures-related
investments are taxed at a blended rate of 60 percent long-term
capital gains and 40 percent short-term capital gains. That yields
an overall rate of 23 percent-less than the ordinary rate that
prevails for most products over the short term.
In the prospectus describing the funds, Bethesda, Md.-based
ProShares warned that leveraged products have particular
characteristics that make them more suitable to vigilant investors
who watch their holdings closely.
"Shareholders who invest in the Funds should actively manage and
monitor their investments, as frequently as daily," the prospectus
said.
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