PowerShares Plans To Lever Precious Metals ETFs
cheers,
john
PowerShares’ DB precious metals commodity fund group has (sort of) announced plans to leverage its gold (DGL), silver (DBS) and precious metals (DBP) ETFs. Investors have received a proxy statement seeking approval of the change at a special meeting on Oct. 9; if approved, the change could be effective within a matter of weeks.
The funds currently track components of the Deutsche Bank Liquid Commodity indexes. The change would amend the funds’ investment objectives to “seek investment results that correspond to twice the changes, whether positive or negative” in the indexes. Other products in the family, including the broad commodity, agricultural, energy and currency ETFs, are not affected by the change. Yet.
The initiative is intended to differentiate the funds, launched in Jan. 2007, from their better known and established competitors including State Street’s StreetTracks Gold Shares (GLD) and the iShares Silver Trust (SLV). Total assets in the three DB precious metals funds at Aug. 31 were just $60 million, compared with more than $11 billion in GLD, $1.6 billion in SLV and more than $1 billion in the diversified DB Commodity ETF (DBC).
Out-performing, mostly: The DB precious metals funds are based on futures contracts, rather than their competitors’ holdings of physical metal; the claimed secret sauce is a proprietary method of handling futures contract ‘rolls’ intended to prevent the funds being picked off at the switches (although the funds’ size constraints also work in their favor).
Since launch, Jan. 5 2007, through Thursday’s close, DGL had showed almost 75 bps of out-performance against GLD, gaining 20.4 percent against GLD’s 19.7 percent. DBS was up 9.5 percent, against the 7.7 gain in SLV. DBP—the 80/20 gold/silver combo—was up 17. 4 percent.
Intra-month, however, the story looks a little different as precious metals have ramped into some combination of flight to the alleged safety of the barbarous relic, the decline of the US dollar and not a little speculative fervor (GLD did almost 12 million shares Thursday, compared with its 90-day average volume of 5.7 million shares).
At Thursday’s close, DGL was up 8.9 percent in Sep., against a 9.3 percent gain in GLD, while DBS was up 10.5 percent against an 11 percent gain in SLV. DBP was up 9.5 percent.
The process: While DB is confident of getting the necessary 50 percent of the funds’ shares voted to approve the changed investment objective, it’s not a done deal until it’s done. Not so long ago, it took Powershares several deferred meeting dates, and six or so increasingly desperate-sounding shareholder letters, to obtain the approvals required to approve the manager’s acquisition by Amvescap (DB Commodity Services LLC is picking up the proxy solicitation tab).
Once shareholders approve the change, the proposal will require The World’s Most Unnecessary Securities Exchange™ to get US Securities and Exchange Commission approval to amend the exchange rule covering the ETFs’ listings. While that step is is unlikely to encounter any serious road-blocks, a suggestion by one source close to the proposal that the change could be effective as early as mid-November seems a tad optimistic; NakedShorts’ money would be somewhat slower track, with Jan 2. 2008 being a more realistic, and perhaps convenient given that the Dec. 2007 Comex contract goes off the board Dec. 27, target date.
The consequences: Leverage cuts both ways, a fact largely forgotten before Goldilocks got her recent wake-up call. But a moderately levered precious metals ETF makes a lot of sense for both the promoters—who concede issues with “the funds’ assets under management and trading volume, as well as competing products”—and traders, if not investors.
It’s hard to make an argument for using either DGL or DBS over their larger competitors, especially as DGL’s 0.54 percent expense ratio is a mere 35 percent higher than GLD’s 0.40 percent. DBP’s mix of both gold and silver extracts a 0.79 percent expense ratio. Small and thinly-traded complicates benchmark tracking, and means wider bid-ask spreads, with most orders routed to the serial securities recidivists on the Amex floor.
The proxy statements said that while the fund would target a 2:1 leverage ratio, actual leverage will fluctuate between 1.8:1 and 2.2:1 depending on the value of its underlying contracts; when leverage breaks that channel, it would rebalance to the 2:1 target on the next business day. The funds’ names will also be amended by inserting the word ‘Ultra’ in the fund names (assuming ProFunds/ProShares, which uses the same word to identify its levered mutual funds and ETFs, doesn’t squawk at the appropriation).
The longer-term outlook: If the precious metals changes work, generating higher trading volumes and a larger asset base, look for similar moves affecting other elements in the DB commodity/currency complex. While the diversified DB Commodity ETF (DBC) has attracted over $1 billion in assets since Feb. 2006, the family’s energy products are as asset challenged as the precious metals funds, with just $16 million in the oil fund (DBO) and about $46 million in the diversified energy fund (DBE).
The US Dollar Index trackers UUP—the ‘Up’ version, which has just $10 million in assets—and UDN, the down version, with just $31.6 million, might also use similar therapy. While currencies have a reputation for volatility, that’s mostly a function of the headline-grabbing profits and losses of professional traders using huge amounts of leverage; entirely unlevered the action is entirely somnolent. Since last Friday, UDN has gained a less than overwhelming 1.3 percent, despite the headlines over the Fed-induced slump in the US dollar.
While the DB commodity and currency complex has had its successes, with the G10 Currency Harvest ETF and the Agricultural Commodity ETF both holding around $500 million, a little juice will likely go a long way to curing what ails the stragglers.
Disclosure: Author is Long DBP, GLD, GDX.
Edited by SilentOne, 21 September 2007 - 03:29 PM.
