What is an Accredited Investor ? (Morningstar)

New Law Changes Wealth Definition


by Tim Galbraith | 07-23-10


President Obama just signed into law a sweeping set of financial reforms contained in the Dodd-Frank Wall Street Reform and Consumer Protection Act. One significant change is the modification of the definition of an "accredited investor."

Accredited investors are a minority in the United States, as the description imposes high-net-worth thresholds. There are many details in the definition, but broadly speaking, the historical accredited investor standard meant investors had to earn $200,000 during the previous two years with the likelihood of earning the same during the forthcoming year. Alternatively, investors not meeting this income test could qualify for accredited investor status by having at least $1 million of net worth, which included all investments and, critically, one's home.

Accredited Growth
These income and asset rules were put into place in 1982. In that year, the SEC estimated that only 1.87% of U.S. households would pass either of those financial tests. With the march of time, inflation and asset appreciation increased incomes, home prices, and the value of other investments. Take for example incomes: Government statistics show that in 1982 the top 5% of households earned just more than $60,000 and by 2008 the income level was $180,000--an increase of 200%. Average home prices rose 237% in the same period, and in some metropolitan areas the appreciation was much more.

The SEC estimated that the percentage of accredited investors increased by 350% from 1982 to approximately 8.47% of households in 2003. In 2010 the percentage was likely higher despite the recent housing and 2008 equity market correction. Like many things that do not adjust for inflation, the old definitions got easier to meet and more investors, even though they may not have felt rich, were now members of the top investment club.

An individual who meets the definition of an accredited investor has access to a group of investment products unavailable to the retail masses, namely private partnerships that can invest in private equity, real estate, commodities, and hedge fund strategies. It is common sense that legislation put in place net-worth tests to limit access to these types of strategies, which typically have poor transparency, intermittent pricing, and episodic liquidity. However, more sophisticated investors who understand the greater risks could potentially benefit from greater return from these investments.

But as net worth increased over time, many investors found themselves technically eligible to be accredited investors, though their own investment proficiency was less than a perfect match for these complicated products. It is easy to imagine a pensioner or school teacher, not able to meet the $200,000 income threshold, but who owns a home in an affluent area, where the housing bubble lifted their net worth more than $1 million. Are they really an accredited investor, able to judge complex trading strategies, partnership tax treatment, or esoteric securities such as a collateralized debt obligation?

Wealth Redefined
The new legislation immediately removes the value of a home when calculating the $1 million net worth limit. Newly minted accredited investors must have true investments in excess of $1 million. The $200,000 income threshold remains unchanged. Additionally, after four years the SEC has the ability to increase the $1 million bar to account for inflation, eliminating the problem of having a fixed net worth hurdle that gets easier to jump with the passage of time. Existing investors who no longer meet the newer accredited standards may not be forced to redeem, but no new money will be permitted to be added unless the investor qualifies.

The most immediate impact of this legislation will be felt on those operating investment products that are limited to accredited investors, namely private partnerships, including hedge funds. The tighter standards will shrink the number of prospects, forcing these partnerships to target larger qualified and institutional clients. Additionally, there will be more scrutiny on partnerships to ensure their accredited investors really meet the new standards. Ultimately, an investment partnership is responsible for ensuring compliance with all securities laws, particularly Regulation D of Rule 501 in the Securities Act of 1933, commonly known as "Reg D." This is where the definition of accredited investor is detailed and the rules of private fund investor solicitation are laid out.

"No one conducts financial audits or demands absolute proof of net worth," says Rory Cohen, partner at the law firm Venable LLP. "But clients typically attest to their net worth through subscription documents, on which broker-dealers and funds rely. Ultimately, the investment partnership is responsible for its ability to assert compliance with the Reg D safe harbor. Partnerships ought to show some reasonable level of diligence in confirming that an investor meets the eligibility requirements."

For funds that target accredited investors, the responsibility to meet the new standards falls to the fund and its general partner. Adds Cohen, "Funds should have a pre-existing substantive relationship with each investor, through which they could gain sufficient information about an investor's occupation and financial circumstances to better assess whether they are accredited. When in doubt, it would be prudent to ask for a tax return."

What are the penalties for failing to meet the Reg D requirements? "Failure to adhere to the private placement requirements could lead to fines and potentially far more punitive measures," says Cohen. The ultimate sanction would be closing a fund and liquidation. The high fees charged to investors by hedge funds means many funds are wealth-creation machines for their fund managers. For a fund manager charging a 2% management fee and a 20% performance fee, closing a partnership is the equivalent of taking the Golden Goose to a barbeque.

For retail investors, it can be argued that the new higher standards to become an accredited investor provide additional protection. Investors can be better matched to investment products that suit their level of understanding and sophistication. For clients and financial advisors, once again, suitability reigns supreme.

One other possible outcome from the new definition could be an increase in the number of mutual funds and exchange-traded funds that attempt to mimic the same strategies as these private partnerships. If you run a private partnership, the new definition means there are fewer prospects; asset raising is more difficult and more costly.

One option is to scrap your partnership and open a mutual fund, where there is no net-worth threshold for investors. The numbers of these alternative mutual funds are growing, and include such hedge fund styles as long-short and market-neutral. Morningstar's last count was 153 funds, with more in the pipeline. For retail investors, the benefits include daily liquidity and pricing, a 1099 tax form instead of a K-1, and no minimum net-worth requirements.

We are encouraged by these changes as they provide additional investor protections. Time will tell if this legislation will be the catalyst for new financial product innovation, nudging private money managers to open mass-appeal products. We are hopeful and very watchful as innovation brings new but not always enduring products. The lasting lesson is something we've known all along, that client suitability is timeless, and knowing your client (and their limits) is a protection that legislation can never universally provide.

Data Sources:
Census.gov (housing data) http://www.census.gov/const/uspricemon.pdf
Census.gov (top 5% income) CPS data
U.S. Congress conference report for HR4173
Federal Register / Vol. 72, No. 2 / Thursday, January 4, 2007 / Proposed Rules (SEC) stats on numbers of accredited investors

Tim Galbraith is head of alternative investment strategies for Morningstar Associates, LLC.

Gold ETF IAU 10 for 1 stock split (ishares)

BlackRock Announces Share Split of iShares® COMEX® Gold Trust
San Francisco, CA, June 11, 2010—BlackRock, Inc. (NYSE: BLK) today announced that the Board of Directors of BlackRock Asset Management International Inc., sponsor of the iShares® COMEX® Gold Trust (NYSEArca: IAU/TSX: IGT) (the "Trust") has authorized a 10 for 1 split for shareholders of record as of the close of business on June 21, 2010, payable after the close of trading on June 23, 2010. The Trust shares will begin trading with split-adjusted pricing on the NYSEArca on June 24, 2010. The Trust, which is cross-listed on the Toronto Stock Exchange, will commence trading on a split adjusted basis on TSX on June 17, 2010. Post-split shares are expected to be distributed to shareholders' accounts on June 28 2010, and shareholders are expected to see the change in their holdings sometime after June 28, depending upon their brokerage firm's procedures.




The 10-for-1 split will lower the share price and increase the number of outstanding shares. The total value of shares outstanding is not affected by a split.



Hypothetical example of 10-for-1 split:



Period Number of Shares Owned Hypothetical Market Price/Share (U.S.$) Total Value (U.S.$)
Pre-split 100 $120 $12,000
Post split 1,000 $12 $12,000

Shares of the iShares® COMEX® Gold Trust are expected to reflect, at any given time, the price of the gold owned by the Trust, less the Trust's expenses and liabilities. As of June 10, 2010, the Trust had U.S. $3.3 billion in total net assets.

Stocks that Benefit from a Weak Dollar (Investopedia)

Stocks That Benefit From A Weak Dollar
Posted: Oct 12, 2009 09:23 AM by Sham Gad

There's a lot of talk today about the future of the dollar. If left unchecked or without an appropriate exit strategy, our massive stimulus programs will have a crippling effect on the value of the dollar. It's simple economics: if you increase supply without a similar increase in demand, the price of your product drops.


What to Consider
Exporters benefit when their home currency weakens relative to the rest of the world because their trading partners can now buy their product for less. This is why China's currency has been undervalued for years. The Chinese government does not let the yuan float freely, which leads many to cite that as the reason China's exports are so incredibly cheap.

Oil and gold also benefit from a weak dollar. Gold is often perceived as a safe haven during periods of asset devaluation. Oil benefits because it's priced in dollars. As we've seen with the oil price over the past few months, that indeed seems to be the case.

Quality Always Matters
So commodity businesses that have pricing power and U.S. companies that do brisk business abroad benefit from a weaker dollar. But let me go on record as saying over the long run, it's not beneficial for a country to continually suffer from a weak currency. In the case of the U.S., that rings even more true since the greenback is regarded as the world's premier currency.

Nonetheless, major oil companies like ConocoPhillips (NYSE:COP) and ExxonMobil (NYSE:XOM) that have substantial operations abroad will be OK. And since a weak dollar also benefits the price of oil, the majors doubly benefit. Construction and engineering firm KBR (NYSE:KBR), a debt-free $3.6 billion company, does a bulk of its work overseas. And because the bulk of KBR's work comes from government agencies, the company continues to prosper as best as one can during a recession.

Foreign Investing
Another option is investing in businesses located outside the U.S. that earn money in other currencies that are likely to strengthen against the U.S. dollar. But such a move poses some risk because the other currency must appreciate and the company needs to maintain its profitability. So while the Japanese yen has gotten stronger against the greenback lately, many Japanese businesses have a tough time of it.

Nations like Brazil and Australia, which are rich in commodities, are expected to resume a healthy GDP going forward. Up north in Canada, you have commodity giant Teck Resources (NYSE:TCK), which does business all over the world and has the Canadian dollar as the functional currency.

Bottom Line
The market rally continues to propel shares higher, including those mentioned above. It's never wise to make any investment based solely on a single macro bet, especially if the prices aren't bargains. But if the dollar does continue to weaken long-term, then businesses with characteristics like those above will benefit.

What to do about the Falling Dollar (Credit Suisse)

The Dollar Is the First Victim of the Recovery


Joy Bolli, Online Publications Credit Suisse


14.09.2009 Over the last few weeks, stock markets have been performing positively – optimism seems to be back. According to Giles Keating, Head of Credit Suisse Global Economics & Strategy Group, this optimism is based on real facts. However, what is good for the world economy doesn't look to be so good for the dollar.

Joy Bolli: Giles, what's behind all this good news?
Giles Keating: First of all, the economy is recovering more strongly than most people expected – albeit from a very low base: We still have lots of unused capacity and we still have high unemployment, but things are moving in the right direction. Secondly, there is a lot of cash out there. Many investors were left behind given the strength of the early pick-up in the stock market. Now they are wondering if they shouldn't be putting their money to work. And thirdly, the policy makers - central banks, governments - have signaled that they are going to maintain a very expansive economic policy, that they are going to keep interest rates very low for a long time, and that they are going to continue their fiscal spending.


What are the risks going forward?
Clearly, one risk is that this economic recovery won't continue, and some economists are very concerned that things might start to drop off when the current rather strong momentum is over in perhaps two or three months' time. The consensus in the Credit Suisse Economic and Strategy Group is, however, that this risk is not very high. On balance, we think that the recovery will continue, given the expansiveness in monetary and fiscal policies. Another risk is that we could actually see some markets moving ahead too strongly, for example some commodity prices. And that, of course, could create trouble elsewhere.


Does this mean that the next bubble is just around the corner?
I think there is a small risk that there's a bubble around the corner. It's more likely that the problem of a bubble lies perhaps 12 months, 24 months or maybe slightly longer into the future. We do know that the financial markets are very prone to lurch between crash and bubble. The very strong medicine that's currently being administered in terms of very low interest rates is great for getting us out of the slump. But history tells us that it does tend to lead us toward the next bubble. So I think there is a risk, but right now it is more likely that we will see prices tending to move up in a number of areas, though probably not reaching into bubble territory for quite some time.


Amid all this good news, the dollar seems to be in trouble. Just a temporary weakness, or a fundamental problem?
The dollar has seen some big downward movements over the last couple of weeks, and although we think that this won't continue in a straight line, we do think it likely that the dollar will continue to weaken over the next six to twelve months. This can be expected to happen both against the major currencies like the euro and the Swiss franc, as well as against some of the high yielders like the Australian dollar and even some of the emerging market currencies like the Brazilian real. So we are recommending diversification out of the dollar.


What makes the dollar so weak?
Interest rates are, of course, very low in the United States, at almost zero. Although they are low in other countries as well, historically the dollar has needed an interest rate premium - a higher interest rate - than in Europe in order to remain stable or rise in value. Another key reason is that, strangely, as financial conditions get less risky and become more stable, people tend to move out of the dollar. Moreover, a lot of people put money into the dollar during the crisis, and now they have too many dollars. And finally, financial transactions were made by some of the world's major banks at the end of last year since they had to buy dollars in order to square up their balance sheets. That effect is now more or less over. For some banks, this is actually going into reverse, so they are now selling dollars.


Do all investors share this rather pessimistic view of the dollar?
No, of course this is a controversial issue, and I know that many investors, although they recognize the dollar problem, also see problems with other major currencies like the euro. But we believe that there are many financial forces that will boost the euro against the dollar. We would therefore recommend a diversification strategy for those who don't feel entirely confident with the euro. In fact, we consider it a good idea for all investors to diversify broadly into a number of other currencies, as well as – to a lesser extent - into precious metals like gold.

Which industry will surprise us with good news in the next six months?
I think a number of them could, but one in particular that my colleagues and I at Credit Suisse would pick out is the technology sector. We have already begun to see parts of the tech sector move up from very low levels. And as we move forward, there are several very favorable factors here. It's not so much consumer demand, although that could play a bit of a role; rather, it's greater demand from companies that cut back their IT expenditure in a big way during the slump. This, along with some new technologies that are coming through, leads us to think that this sector could perform rather well.


And which commodities will be among the best performers?
We think precious metals can continue to move up. At this current time, gold for example has just broken through the 1000 dollar level, and we think it could certainly head to somewhere around the 1100 level. And some of the other precious metals like platinum could continue higher. We are slightly more cautious about base metals such as copper. We think their inventories have gotten somewhat too high. Regarding oil, some of the bigger countries in OPEC are not keen to see oil get too strong. So we think the trend is up, but perhaps not dramatically so.

the Declining Dollar - Hedge Your Portfolio (Barrons)

Foreign-Reserve Bingo
By ROBERT FLINT
What investors seek as they exit dollar-denominated assets.



INVESTORS OF ALL STRIPES NEED TO BRACE THEMSELVES for a world in which the U.S. dollar no longer plays the dominant role.Although the greenback will remain the currency of choice in trade and finance for many more years, signs have already emerged that changes are under way.

Governments abroad have grown increasingly skeptical about the dollar as a store of value for their national reserves. China, Russia and others have expressed concern about their dollar-denominated holdings because of the budget deficits the U.S. faces in financing bailout and stimulus measures.
Some countries have taken steps to reduce the proportion of their reserves held in dollar-denominated assets by switching to investments that will hold their value as consumer prices rise.
The U.S. decision announced Wednesday to boost sales of Treasury inflation-protected securities, or TIPS, is largely seen as a nod to China, the world's largest holder of U.S. government debt.


The search for alternatives to the greenback, while still in its early stages, will eventually have broad implications. Diversification of foreign-exchange reserves is no longer an issue solely for central banks and monetary authorities.

So where does that leave individual investors? Is there such a thing as a diversification play?

There is, say analysts, but it's more a long-term strategy. The dollar's allure has been tarnished, but any significant shift away from U.S. assets by central banks will take years.

"It won't happen overnight," says Andrew Busch, global foreign-exchange strategist at BMO Capital in Chicago.

There's still no other country or region that can match the liquidity and depth of U.S. capital markets. The dollar will continue to play a key role in the placement of foreign-exchange reserves until a viable alternative emerges. So far, there's been no evidence of any officially sanctioned dumping of the dollar.

One strategy for investors would be to mimic central banks and slowly move more of their holdings into non-dollar-denominated assets. The euro is most obvious option, at least in the short run, says Busch.

James Trippon, editor of the China Stock Digest, suggests investors can position themselves to benefit from inflation and a declining dollar through commodity-related plays in energy, metals or even foodstuffs. Australia and New Zealand, with commodity-based economies, stand to benefit as the world economy heals and growth speeds up again in China.
Another option would be American depositary receipts of Chinese corporations in the energy, banking or insurance sectors, Trippon says.

For private investors as well as central banks, it amounts to slow and careful diversification away from the dollar. Coping with a less-than-almighty dollar is an unnerving prospect for many Americans, but one they are bound to face.




--------------------------------------------------------------------------------

WSJ Deal Journal: Basis Trade ( Bond + Credit Default Swap)

May 4, 2009, 1:30 AM ET

The Brighter Side of ‘Evil’ Credit-Default Swaps
By Heidi N. Moore

Credit-default swaps have been demonized as having played a role in the struggles of insurer American International Group and in the collapse of Bear Stearns.

But these derivatives can be a force for good. Indeed, demand for credit-default swaps is among the factors spurring the revival in the market for corporate bonds. Large institutional investors, hedge funds in particular, are buying more investment-grade and high-yield corporate bonds of late and are pairing them with credit-default swaps to earn extra return, according to investment bankers.

The bond-swap combinations are called “basis packages,” though they aren’t sold together. The name refers to “basis trades,” a common way for investors to take advantage of the price differences between a derivative and the underlying security. In the current iteration, an investment bank sells bonds on behalf of a company and the buyers then buy swaps tied to the bonds. In the past month, this investment strategy has helped spur demand for bond offerings from Lenar, Supervalu and Toll Brothers.

Credit-default swaps are a kind of insurance policy against issuers defaulting on their debt. In the past few years, hedge funds bought swaps largely to bet a company might default, and then bought the underlying bonds because they needed to pair the so-called short (swaps) and long (bond) positions. Now, hedge funds want the bonds and are buying the swaps to juice their returns and pair the trade.
It can be a profitable strategy in volatile markets, which is one reason bankers say it has picked up steam in the past month.

Here is how the math can work: A hedge fund buys a company bond trading at 50 cents on the dollar and a swap tied to the debt at, say, 80 cents on the dollar. If the issuer defaults and the debtholders get, say, 30 cents on the dollar in a recovery, the hedge fund would have a loss of 20 cents on the dollar for the bonds but a return of 50 cents on the dollar on the swap.
Such basis packages drove hedge-fund interest in recent high-yield deals, such as Supervalu’s $1 billion offering on April 30, according to people familiar with the deal. Supervalu originally intended to sell only $500 million of bonds, but hedge funds looking to fill basis packages doubled the demand. These people say it was sold to 200 institutional investors. In fact, the Supervalu offering was spurred by what investment bankers call “reverse inquiry,” which means buyers actually approached the investment banks—Credit Suisse Group, Bank of America Merrill Lynch, Citigroup and Royal Bank of Scotland Group—seeking out a deal.

The strategy poses risks if investors have to sell positions to meet margin calls for the bonds or the swaps before either brings a return.

Credit-default swaps may not yet have a sparkling-clean reputation—but for many investors that is a secondary concern, since sitting around on piles of cash is no way for a hedge fund to live.

List of Leveraged ETFS (FROM YORK INVESTMENTS)

Leveraged ETFs

March 9, 2009 by York

Commodities Agriculture
2x Leverage Long - DB Agriculture Double Long ETN (DAG)
3x Leverage Long - None
2x Leverage Short - None
3x Leverage Short - None

Commodities Diversified
2x Leverage Long - DB Commodity Double Long ETN (DYY), Proshares Ultra Commodity (UCD)
3x Leverage Long - None
2x Leverage Short - DB Commodity Double Short ETN (DEE), Proshares Ultrashort Commodity (CMD)
3x Leverage Short - None

Gold
2x Leverage Long - DB Gold Double Long ETN (DGP), Proshares Ultra Gold (UGL)
3x Leverage Long - None
2x Leverage Short - DB Gold Double Short ETN (DZZ), Proshares Ultrashort Gold (GLL)
3x Leverage Short - None

Silver
2x Leverage Long - Proshares Ultra Silver (AGQ)
3x Leverage Long - None
2x Leverage Short - Proshares Ultrashort Silver (ZSL)
3x Leverage Short - None

International Developed Diversified
2x Leverage Long - None
3x Leverage Long - Direxion Developed Markets Bull 3x (DZK)
2x Leverage Short - Proshares Ultrashort MSCI EAFE (EFU)
3x Leverage Short - Direxion Developed Market Bear 3x (DPK)

International Emerging Diversified
2x Leverage Long - None
3x Leverage Long - Direxion Emerging Markets Bull 3x (EDC)
2x Leverage Short - Proshares UltrashortMSCI Emerging (EEV)
3x Leverage Short - Direxion Emerging Market Bear 3x (EDZ)

Energy
2x Leverage Long - Proshares Ultra Oil and Gas (DIG), Rydex 2x Energy (REA)
3x Leverage Long - Direxion Energy Bull 3x (ERX)
2x Leverage Short - Proshares Ultrashort Oil and Gas (DUG), Rydex Inverse 2x Energy (REC)
3x Leverage Short - Direxion Energy Bear 3x (ERY)

Financials
2x Leverage Long - Proshares Ultra Financials (UYG), Rydex 2x Financials (RFL)
3x Leverage Long - Direxion Financial Bull 3x (FAS)
2x Leverage Short - Proshares Ultrashort Financials (SKF), Rydex Inverse 2x Financials (RFN)
3x Leverage Short - Direxion Financial Bear 3x (FAZ)

Domestic Large Cap
2x Leverage Long - Proshares Ultra Dow 30 (DDM), Proshares Ultra QQQ (QLD), Proshares Ultra Russell 1000 Growth (UKF), Proshares Ultra Russell 1000 Value (UVG), Proshares Ultra S&P 500 (SSO), Rydex 2x S&P 500 (RSU)
3x Leverage Long - Direxion Large Cap Bull 3x (BGU)
2x Leverage Short - Proshares Ultrashort Dow 30 (DXD), Proshares Ultrashort QQQ (QID), Proshares Ultrashort Russell 1000 Growth (SFK), Proshares Ultrashort Russell 1000 Value (SJF), Proshares Ultrashort S&P 500 (SDS), Rydex Inverse 2x S&P 500 (RSW)
3x Leverage Short - Direxion Large Cap Bear 3x (BGZ)

Domestic Mid Cap
2x Leverage Long - Proshares Ultra Midcap 400 (MVV), Proshares Ultra Russell Midcap Growth (UKW), Proshares Ultra Midcap Value (UVU), Rydex 2x S&P Midcap 400 (RMM)
3x Leverage Long - Direxion Mid Cap Bull 3x (MWJ)
2x Leverage Short - Proshares Ultrashort Midcap 400 (MZZ), Proshares Ultrashort Midcap Growth (SDK), Proshares Ultrashort Midcap Value (SJL), Rydex Inverse 2x Midcap400 (RMS)
3x Leverage Short - Direxion Mid Cap Bear 3x (MWN)

Domestic Small Cap
2x Leverage Long - Proshares Ultra Russell 2000 (UWM), Proshares Ultra Russell 2000 Growth (UKK), Proshares Ultra Russell 2000 Value (UVT), Proshares Ultra S&P Smallcap 600 (SAA), Rydex 2x Russell 2000 (RRY),
3x Leverage Long - Direxion Small Cap Bull 3x (TNA)
2x Leverage Short - Proshares Ultrashort Russell 2000 (TWM), Proshares Ultrashort Russell 2000 Growth (SKK), Proshares Ultrashort Russell 2000 Value (SJH), Proshares Ultrashort Smallcap 600 (SDD), Rydex Inverse 2x Russell 2000 (RRZ)
3x Leverage Short - Direxion Small Cap Bear 3x (TZA)

Technology
2x Leverage Long - Proshares Ultra Semiconductors (USD), Proshares Ultra Technology (ROM), Rydex 2x Technology (RTG)
3x Leverage Long - Direxion Technology Bull 3x (TYH)
2x Leverage Short - Proshares Ultrashort Semiconductors (SSG), Proshares Ultrashort Technology (REW), Rydex Inverse 2x Technology (RTW)
3x Leverage Short - Direxion Technology Bear 3x (TYP)

Euro
2x Leverage Long - Market Vectors Double Long Euro ETN (URR), Proshares Ultra EURO (ULE)
3x Leverage Long - None
2x Leverage Short - Market Vectors Double Short Euro ETN (DRR), Proshares Ultrashort EURO (EUO)
3x Leverage Short - None

Commodities Base Metals
2x Leverage Long - Powershares DB Base Metals Double Long ETN (BDD)
3x Leverage Long - None
2x Leverage Short - Powershares DB Base Metals Double Short ETN (BOM)
3x Leverage Short - None

Crude Oil
2x Leverage Long - Powershares DB Crude Oil Double Long ETN (DXO), Proshares Ultra Crude Oil (UCO)
3x Leverage Long - None
2x Leverage Short - Powershares DB Crude Oil Double Short ETN (DTO), Proshares Ultrashort Crude Oil (SCO)
3x Leverage Short - None

Basic Materials
2x Leverage Long - Proshares Ultra Basic Materials (UYM)
3x Leverage Long - None
2x Leverage Short - Proshares Ultrashort Basic Materials (SMN)
3x Leverage Short - None

Consumer Goods
2x Leverage Long - Proshares Ultra Consumer Goods (UGE)
3x Leverage Long - None
2x Leverage Short - Proshares Ultrashort Consumer Goods (SZK)
3x Leverage Short - None

Consumer Services
2x Leverage Long - Proshares Ultra Consumer Services (UCC)
3x Leverage Long - None
2x Leverage Short - Proshares Ultrashort Consumer Services (SCC)
3x Leverage Short - None

Healthcare
2x Leverage Long - Proshares Ultra Healthcare (RXL), Rydex 2x Healthcare (RHM)
3x Leverage Long - None
2x Leverage Short - Proshares Ultrashort Healthcare (RXD), Rydex Inverse 2x Healthcare (RHO)
3x Leverage Short - None

Industrials
2x Leverage Long - Proshares Ultra Industrials (UXI)
3x Leverage Long - None
2x Leverage Short - Proshares Ultrashort Industrials (SIJ)
3x Leverage Short - None

Real Estate
2x Leverage Long - Proshares Ultra Real Estate (URE)
3x Leverage Long - None
2x Leverage Short - Proshares Ultrashort Real Estate (SRS)
3x Leverage Short - None

Utilities
2x Leverage Long - Proshares Ultra Utilities (UPW)
3x Leverage Long - None
2x Leverage Short - Proshares Ultrashort Utilities (SDP)
3x Leverage Short - None

Telecommunications
2x Leverage Long - Proshares Ultra Telecommunications (LTL)
3x Leverage Long - None
2x Leverage Short - Proshares Ultrashort Telecommunications (TLL)
3x Leverage Short - None

Yen
2x Leverage Long - Proshares Ultra Yen (YCL)
3x Leverage Long - None
2x Leverage Short - Proshares Ultrashort Yen (YCS)
3x Leverage Short - None

China
2x Leverage Long - None
3x Leverage Long - None
2x Leverage Short - Proshares Ultrashort China (FXP)
3x Leverage Short - None

Treasuries
2x Leverage Long - None
3x Leverage Long - None
2x Leverage Short - Proshares Ultrashort Lehman 20+ (TBT), Proshares Ultrashort Lehman 7-10 (PST)
3x Leverage Short - None

Japan
2x Leverage Long - None
3x Leverage Long - None
2x Leverage Short - Proshares Ultrashort Japan (EWV)
3x Leverage Short - None

Reverse ETFs not a long term vehicle (WSJ)

Friday, February 27, 2009 As of 9:37 PM EST
THE INTELLIGENT INVESTOR FEBRUARY 27, 2009, 9:37 P.M. ET How Managing Risk With ETFs Can Backfire
By JASON ZWEIG
Article
Comments (14)


Alcohol ads urge us to "drink responsibly." Cigarette packs are emblazoned with the surgeon general's warnings about cancer. And the firms that sell leveraged exchange-traded funds keep begging individual investors not to buy the things because they are meant only for short-term trading and can have erratic long-term returns.

Nonetheless, roughly 13,000 people are killed in alcohol-related crashes each year, over 33 million Americans smoke at least once a day -- and more than $2 billion has poured into leveraged ETFs so far this year, much of it from financial advisers and retail investors who hang on too long.

ETFs are funds that trade during the day like stocks. A leveraged ETF seeks to use futures and other derivatives to multiply the daily return of a market index. Some, called "ultra," "2X" or "3X bull," attempt to double or triple the market's return each day. Others try to double or triple the opposite of an index's return; on a day when the market goes down, these "ultra-short," "inverse 2X" or "3X bear" funds should go up two or three times as much.

On Thursday, the Standard & Poor's 500-stock index dropped 1.6%. ProShares UltraShort S&P500, which tries to deliver twice the inverse of the index's daily return, went up 3.2% -- right on target.


So why bother with a boring index fund when you could double or triple your money by using a leveraged ETF? And why helplessly watch your stocks wither away when an inverse leveraged fund could let you mint money in a falling market?

There are 106 such funds with $46 billion in assets, much of it "hot money" that flies right back out. On Wednesday, trading volume for Direxion Financial Bear 3X totaled 23.1 million shares on only two million shares outstanding -- implying an average holding period of less than 34 minutes.

Leveraged ETFs are perfectly suited to such itchy-fingered traders, who can obsessively adjust their holdings to maintain a targeted level of exposure.

But even some "financial advisers," who run ordinary investors' money, hang onto leveraged ETFs the way a sharpshooter clings to a favorite rifle. And if you don't understand how these funds work, you could take a bullet yourself. Their returns are predictable relative to the index only if you own them for one day or less. Over longer periods, say a week or more, these funds can wander wildly away from the underlying index.

When a market is trending in the same direction, a leveraged ETF can race ahead as it adjusts its leverage to its rising assets, jacking up its exposure to the market's next move. Last Nov. 4 through Nov. 20, the Russell 1000 index of large stocks kept falling until it lost 25.6%. In response, Direxion Large Cap Bear 3X, an inverse fund, went up even more than its triple target; it rose 109.2%, four times as much as the Russell went down.

What happens when a market doesn't take a straight path? Let's say you were bearish on China and invested $10,000 in ProShares UltraShort FTSE/Xinhua China 25 on Oct. 9, 2008. Each day the Chinese market went down, this double-reverse fund went up twice as much. It also fell twice as much on any day when China rose.

These swings make it hard for a leveraged fund to match its targeted return in the long run; each loss requires a bigger gain just to get back to break-even. As the Chinese market heaved up and down over the next nine tumultuous trading days, $10,000 invested in Chinese stocks would have dropped to less than $9,200, a cumulative loss of 8%. Did the ultra-short fund deliver twice the opposite, or a 16% gain? No: According to data from Morningstar, it shriveled to $7,838, a 21.6% loss. So much for longer-term hedging.

Still, many financial advisers believe these funds are a good long-term hedge against falling markets. At a recent conference, roughly 50 financial advisers besieged Matthew Hougan, editor of IndexUniverse.com, a financial Web site, asking him to explain how leveraged ETFs work. Some "are starting to understand," says Mr. Hougan, "but there is still a huge contingent out there who don't."

Like an amen corner, the leveraged ETF firms all say they keep trying to scare off long-term investors. The funds "are not a buy-and-hold vehicle," warns Michael Sapir, chairman of ProShare Advisors. "These products are designed for trading use, not to be hedging tools," insists Carl Resnick, vice president at Rydex Investments. Holding a leveraged ETF for longer than a day, says Andy O'Rourke, marketing chief at Direxion Funds, is "like using a toaster to cook a turkey."

The bottom line: Leveraged ETFs are for day traders. You can't manage long-term risk with a short-term tool -- especially not with one that can blow up in your face.

Write to Jason Zweig at intelligentinvestor@wsj.com

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How to Use Inverse Exchange Traded Funds on Marketwatch

ETF INVESTING

Short plays only

Holding leveraged and inverse ETFs too long distorts objectives

By John Spence, MarketWatch

Last update: 3:32 p.m. EST Jan. 18, 2009BOSTON (MarketWatch) -- The market rout in 2008 has exposed the dangers of leveraged and leveraged inverse exchange-traded funds, designed to capture two or three times the movement in a particular stock index or provide 100% opposite results, as investors learned the hard way about the tax and performance distortions inherent in the funds.
These relatively new financial products are "among the fastest growing segments of the U.S.-listed ETF market" with $21.6 billion in assets and $17.4 billion in average daily trading volume, Morgan Stanley analysts led by Dominic Maister wrote in a research note last week.



Leveraged and inverse ETFs are "appropriate tools for some investors looking to make short-term tactical trades if they perceive a high likelihood of a strong market move occurring in a relatively short time period," said Maister.
In other words, traders and speculators can get more bang for their buck if they're trying to exploit quick market swings. Of course, losses are also magnified when markets move against the trade.
However, the effects of compounding "and the daily re-levering or de-levering that occurs within leveraged and leveraged inverse ETFs can lead to unexpected results over the long-term," Maister said. Investors probably don't want to hold leveraged and inverse ETFs more than a few days, experts warn.
The key point is that these ETFs provide leverage on a daily basis. Simply, investors are mistaken if they think they can buy a twice-leveraged ETF, hold it for a year, and end up with double the market's return.
"We cannot stress enough that these aggressively leveraged products are not suitable as long-term investments," said John Gabriel, ETF analyst at Morningstar.
Understanding performance
Market volatility can also play havoc with performance over longer periods. Some analysts have seized on the performance of leveraged ETFs tracking energy stocks during a wild 2008. The sector rose early in the year but corrected hard during the back half.
ProShares Ultra Oil & Gas ( ProShares Ultra Oil
DIG) lost 72% in 2008, according to ProShares. The bearish leveraged version, ProShares UltraShort Oil & Gas ( DUG) , also lost money last year, shedding nearly 11%. Yet on a daily basis, the ETFs delivered their targeted leverage like clockwork, so they behaved exactly as they should have.
In fairness, the providers of leveraged and inverse ETFs are upfront about the performance issues over the long term on their Web sites and in the prospectus.
"A common misconception is that ProShares should also provide 200%, -200% or -100% of index performance over longer periods, such as a week, month or year," ProShares says on its site. "However, ProShares' returns may be greater than -- or less than -- what you'd expect over longer periods." See the document at ProShares.com.
Therefore, if investors do stay in leveraged funds for any extended period of time, they should consider rebalancing frequently and keep a close eye on performance.
ProShares Chief Executive Michael Sapir said the firm wants all its investors to understand the math of compounding returns and how it affects its leveraged financial products.
"We think we've done a good job in trying to disclose the information," Sapir said in an interview. "We welcome every opportunity to get the word out."

ETFs on steroids

ProShares is one of a trio of investment managers overseeing leveraged and inverse ETFs that also includes Rydex Investments and Direxion Funds.
Leveraged ETFs managed by ProShares and Rydex are designed to provide 200% of the daily performance of their targeted indexes. Their inverse ETFs shoot for 100% of the inverse, or opposite, daily return, so they can be used to bet against markets or hedge.
Leveraged inverse ETFs aim for negative 200% returns on a daily basis. So if the target benchmark fell 2% in a trading session, these leveraged inverse ETFs are geared to rise about 4%, minus fees and transaction costs.
More recently, Direxion Funds has launched ETFs to provide even more leverage, at 300%, of daily index returns in both directions. The funds have gotten off to a strong start in terms of attracting assets and trading volume.
Some traders like juiced-up ETFs because the funds allow them to get leveraged exposure to the market or individual sectors in liquid vehicles that can be bought and sold during the day. Investors don't have to open up a margin account to tap leverage.
Meanwhile, inverse ETFs let investors profit from market declines or hedge their long positions.

Why taxes work differently from 'vanilla' ETFs

The tax efficiency associated with plain-vanilla ETFs that track stock indexes is a result of the specialized way in which shares are created and redeemed. Although the "in-kind" creation and redemption process is complex, these stock ETFs can protect against the potential tax hits often seen in mutual funds when managers are forced to sell stock and raise cash to meet shareholder redemptions.
However, leveraged and inverse ETFs keep their assets in a pool of cash and use swaps and derivatives to deliver performance -- a key difference.
"If the fund goes into net redemptions and starts to shrink in assets, the managers must sell some of the derivatives they used to replicate their benchmark instead of passing them off to the authorized participants," wrote Morningstar's Gabriel in a recent report.
Authorized participants are institutional traders responsible for keeping orderly markets in ETFs by creating and redeeming shares based on demand.
Leveraged funds typically use daily swaps to gain their exposure, and these contracts are always settled in the short term, added Paul Justice, an ETF strategist at Morningstar.
"Most of the ETF assets are held in Treasury accounts, but the leveraged performance is generated by using short-term swaps and futures contracts. Those funds that performed well accumulated large capital gains when the funds spiked in October," he said.
"But when many shareholders liquidated their positions, those taxable gains were later split amongst fewer shareholders," Justice said. "Unfortunately, some investors that hung on too long are in for an unpleasant tax surprise."
In late December, for instance, ProShares announced capital gains distributions for 35 of its 76 leveraged and inverse ETFs. At Rydex, the Rydex Inverse 2X S&P Select Sector Energy ETF ( REC) paid out capital gains of more than 70% of net asset value, according to investment researcher Morningstar Inc. Those gains caught some investors off guard. Read more on this ETF surprise at WSJ.com.
However, the analysts said the distributions aren't grounds to avoid short and leveraged ETFs, just a reason for caution.
"These funds still have the trading advantages of liquidity, timeliness, and low commissions just like every other ETF. They still provide hedging and speculative opportunities that are otherwise inaccessible to the individual investor," Gabriel said. "They do not possess the impressive tax advantages of most ETFs, but they should still perform no worse than a similarly structured traditional open-end mutual fund on this point."
The old saw merits repeating here -- investors should always consult with a tax adviser.
John Spence is a reporter for MarketWatch in Boston.

Sectors to Short (from Morningstar)

Stock Strategist


Four Sectors to Avoid, Sell, or Short with ETFs
By Paul Justice, CFA | 11-21-08 | 12:00 PM

Unless you've been on the sidelines or have been shorting the market since the summer, chances are that you have more than a few double-digit losers in your portfolio. You are not alone. I have my fair share of losers, and so do most of yesteryear's "top" money managers. Now, we could all get together and have a big kumbaya party, but that would simply treat the symptoms while ignoring the disease. We would be better served by taking our feelings out of the equation, reviewing our investment strategy, reassessing our tactical investment decisions, and learning from any mistakes that we've made. Once the errors have been identified, rectify them by either determining whether they merit staying in your portfolio or by selling them regardless of how much they have lost.


An interesting bit from the annals of behavioral finance theory is Kahneman and Tversky's prospect theory, which suggests that individuals are more upset by losses than they are pleased by equivalent gains. The pain is so great that investors in stocks avoid selling losers and often take even greater risks in the hope of simply breaking even. The same research also suggests that investors avoid making short sales (bets that an investment will go down) simply because they are afraid of having to cover their short positions at a loss sometime down the road.

Admittedly, short-selling is not for everyone. Don't do it without a sound thesis, considerable research, and a tough stomach. Over the long haul, stocks tend to go up (at least the past says so--let's hope that is still true). But no investor should avoid selling an investment that is down 50% simply in the hope that it will rebound. Here's a fact: An investment that fell 50% from where you purchased it can still go down 100% from where it is today. Reallocating those funds to a better prospect is a good idea, especially if you can use those realized losses to offset taxable gains.

With selling in mind, we've outlined five ETFs that investors should consider selling today. Where appropriate, we've tried to give investors a viable alternative to either purchase outright or with which to establish a pair trade.

High-Yield Corporate Bonds

In September and October, the credit spreads on high-yield bonds shot to never-before-seen levels. As of this writing, the high-water mark was roughly somewhere around 1,550 basis points over Treasury bonds, which translates to yields of nearly 20%. Still, we recommend that investors avoid high-yield ETFs such as iShares iBoxx $ High Yield Corporate Bond (HYG) and SPDR Lehman High Yield Bond (JNK) for the simple reason that we think things are going to get worse for high-yield issuers before they get better. Loose lending was not limited to residential mortgages during the past five years. Buyout firms and companies drank their fill from the cheap and easy debt trough. Now we have a host of companies that were overleveraged during the best of economic times staring a prolonged recession in the face. When a company has a weak balance sheet, its borrowing costs are rising, and its profits are dropping, the likelihood of bankruptcy increases exponentially. Many forecasters are projecting the default rates on these bonds will rise to anywhere between 8% and 12%. We fear that number could go much higher as the shutdown in the capital markets will preclude these firms from selling assets, raising equity, or even rolling over existing debt, thus exacerbating the impact of an economic recession.

Investors looking to capitalize on the high credit spreads that exist throughout the market would be much better served considering an investment in investment grade corporate bonds like those represented by iShares iBoxx $ Investment Grade Corporate Bond (LQD). Even this is not without risk, given that both Lehman and Washington Mutual were still rated investment grade when they went under. Still, the diversification of risk offered by the index structure will minimize the impact of one-off collapses keeping investors from suffering the permanent capital impairment that would have come from holding just a single bond issue.


Emerging Market Large-Caps
Large-cap emerging-markets equities are facing a Category 5 storm of bad market conditions. The global recession continues to drive down commodity prices, which will decimate the earnings of companies like Petrobras (PZE), Gazprom, and Posco (PKX)). National champion banks such as HDFC (HDB), China Construction Bank, and Banco Santander-Chile lent the billions of dollars of credit that funded the recent boom, and their future now holds higher default rates, few profitable loan opportunities, and even the possibility of governments forcing new credit to be supplied at artificially low rates. The advanced technology conglomerates like Samsung and Taiwan Semiconductor (TSM) face the worst global environment for consumer discretionary spending in decades. Finally, emerging-markets currencies are plummeting against the dollar, which further exacerbates the losses for U.S. shareholders. The most positive thing we can say about emerging-markets large caps is that they have already been beaten up, having dropped nearly 60% for the year to date, but that hardly precludes further losses given the potential for currency crises and the still-forthcoming bad earnings news from banks and commodities producers. Investors with stakes in iShares MSCI Emerging Markets Index (EEM) or BLDRs Emerging Markets 50 ADR Index (ADRE) should consider selling out or even shorting.

A naked bet on further falls may seem too risky. After all, the MSCI Emerging Markets Index trades around a P/E ratio of 8.5 and a price/cash flow ratio of 5.5. Clearly these stock prices already anticipate a deep recession and poor future earnings, so how much further could they fall? To offset the potential risk that emerging markets have hit bottom, we suggest a long position in emerging-markets small caps using WisdomTree Emerging Markets SmallCap Dividend (DGS). Relative to emerging-markets large caps, this fund has far less exposure to commodities producers or telecoms while concentrating instead in local consumer and business services, which should hold up relatively well as growth in emerging economies merely slows rather than halting. WisdomTree Emerging Markets SmallCap also has far smaller investments in the vulnerable Chinese, Mexican, Indian, and Russian markets than its rival large-cap funds, which should help its relative performance. Finally, emerging-markets small caps are likely to outperform because they will start from an even cheaper basis. Although these stocks did not fully participate in the gigantic emerging-markets rally of 2003-07, they have suffered alongside large caps in the fall. For that reason and the general value tilt from WisdomTree's dividend-weighting methodology, the stocks in WisdomTree Emerging Markets SmallCap Dividend are currently trading at a P/E ratio of 7 and a stunningly low price/cash flow ratio of 4.7 despite their brighter future! Shorting emerging-markets large caps and investing in their smaller cousins provides a tempting relative-value trade for intrepid investors.


Coal Producers
Few sectors were impacted as greatly as the energy sector by the proliferation of new ETFs over the past two years. Nuclear, natural gas, oil, and alternative energy all have several different funds from which to choose, and most of those include inverse and leveraged bets for both long investments and shorting. Included in that lineup was Market Vectors Coal ETF (KOL), an ETF frequently purchased by individual investors in the face of rising coal prices. What many investors failed to consider when spot coal prices were soaring is the fact that over 90% of the trading of this commodity is conducted via direct contracts. Thus, the spot market is only a proxy for a small fraction of the actual sales. Not all coal producers were realizing triple-digit prices for their goods, and those that were have seen the spot market evaporate with the recent pullback in global economic activity. While our equity analysts see only a modest contraction in the volume of coal consumed for electricity production over the next few years, the same cannot be said for coal used by industrial consumers. Thus, the good times for coal producers will not likely reach the levels seen in 2007 and 2008 until robust world economic growth returns. Throw in the sweeping victory by Democrats, and the appointment of Henry Waxman as chairman of the Energy and Commerce Committee replacing John Dingell, and it appears the federal government's attitude toward curbing greenhouse gas emissions is becoming more determined. Given coal's distinct disadvantage in this space, times indeed look more pessimistic for America's most abundant fuel.


REITs
The residential real estate market sits at the epicenter of the current crisis. Chances are that if you've picked up a newspaper or turned on the television over the past few months then you've already been briefed on just how ugly it's getting out there. However, we'd also like to highlight some cracks we see in the commercial real estate market. We want to caution investors about a potential parade of dividend cuts that seem to be on the horizon for the REIT industry. Avoiding the sector altogether is probably a wise choice, but the most daring and risk-seeking investors might even consider selling the sector short.

The REIT market has benefited over the past several years from loose credit terms, low interest rates, and rising property values. Strong and consistent historical performances over this period led many investors to believe that REITs could be considered a safe haven with healthy dividend income streams. Surprise! The party is now over. The tail winds that benefited the industry over the past several years are turning into strong head winds. Many firms in the industry took on unsustainable levels of debt to expand their asset bases. Now, those same assets are falling precipitously in value. We should also expect to see rental rates come down as vacancy rates increase. This should in turn depress cash flows and possibly impair some firms' ability to meet the debt obligations they assumed when the economic outlook was rosy. The long lead times that are typical for commercial real estate projects brings up another issue. Many projects that were undertaken a few years ago may have been economically attractive at the time. However, things have changed drastically and many projects may turn out to be value destroyers. But, because many projects are already so close to completion, there's no turning back.

So, how can investors apply this sector thesis? UltraShort Real Estate ProShares (SRS
SRS) is the easiest way to gain leveraged short exposure to the industry. Barclays' iShares family of ETFs has also sliced the REIT market every which way, so we'd take a look at getting short the retail and hotel subsectors of the REIT industry there (iShares FTSE NAREIT Retail (RTL) and iShares FTSE NAREIT Industrial/Office (FIO)). The most popular REIT ETFs, in terms of assets under management, that investors may wish to keep an eye on include Vanguard REIT Index ETF (VNQ), iShares Dow Jones US Real Estate (IYR), and SPDR DJ Wilshire REIT (RWR).
John Gabriel









Paul Justice is a senior stock analyst with Morningstar.

Make Money in Down Markets with Inverse ETFs

This blog, crashmarketstocks.com, has a good description of the inverse ETFs (like SDS and QID) that you can use to make money in down markets and hedge the long positions in your portfolio.

Make Money in Down Markets - an easy and simple way to hedge

Hedge Your Portfolio
from US News and World Report

By Katy Marquardt
Posted December 20, 2007

It can pay to play defense in a market often buffeted by fast and furious one-day drops. In small doses, funds that use hedging strategies can reduce risk in your overall portfolio because their performance doesn't move in tandem with the stock or bond markets. Using sophisticated techniques such as short-selling and options, these funds aim to guard against market declines and still produce respectable long-term returns.



When former economics professor John Hussman's market outlook is gloomy, he can hedge some—or all—of his Hussman Strategic Growth fund using options to bet against major market indexes. The fund is currently fully hedged, its most bearish position. The portfolio holds more than 100 stocks Hussman thinks are somewhat cheap relative to their growth potential. "We're also hedged with indexes that behave similarly and reflect the stocks we own," says Hussman. "The idea is to earn the difference in the stocks' performance." The fund, which returned 11 percent a year on average from its July 2000 launch through December 1, charges a below-average 1.17 percent in annual expenses.

Michael Orkin hedges his Caldwell & Orkin Market Opportunity fund by short-selling—or betting against—individual stocks or sectors. Orkin's bets against the home-building and subprime mortgage sectors helped the fund gain a whopping 33 percent over the past year. It returned an annualized 7 percent over the past decade, 1 percentage point ahead of the S&P 500, with significantly less volatility. The fund charges 1.75 percent in annual fees.

You can execute your own hedging strategy by investing in an exchange-traded fund (ETF) that bets on the decline of an index, investing style, or sector of the market. ProShares' short-selling etfs produce inverse returns of a particular index. For instance, the Short Dow30 bets against the Dow Jones industrial average. The firm also offers a line of "ultra" funds, which essentially return double the opposite of an index's daily gain. Although these funds aren't as risky as pure short-selling, approach them with caution.


http://www.usnews.com/articles/news/50-ways-to-improve-your-life/2007/12/20/hedge-your-portfolio.html