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Big Rollout of Leveraged, Short ETFs

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The last quarter of 2008 was very busy for the ETF marketplace. Between Direxion Shares and ProShares, 22 new leveraged and short ETFs were launched. Also, Claymore, WisdomTree Investments and XShares Group each launched one ETF.

All of the Direxion ETFs attempt to magnify the performance of their underlying indexes by 300 percent on the upside or 300 percent on the downside. Direxion’s ETFs use a combination of derivatives, futures, and swaps to obtain their leverage.

According to the prospectus, the funds will charge annual expenses of 0.95 percent.

The Direxion Large Cap Bull 3x ETF (BGU) and the Direxion Large Cap Bear 3x ETF (BGZ) both use the Russell 1000 large cap index as a benchmark.

BGU provides investors or traders that are bullish on the prospects of large company stocks with 300 percent upside exposure to the daily performance of the Russell 1000. Conversely, BGZ attempts to deliver inverse daily performance of the Russell 2000 small cap index by 300 percent.

Direxion manages around $1.5 billion in mutual funds using similar leveraged and inverse performing strategies.

Not to be outdone, ProShares launched 8 leveraged and short ETFs that target commodities and currencies. The funds are the first such ETFs to offer this type of specialized exposure to these two asset classes.

The UltraGold ETF (UGL) attempts to double its upside performance based upon any increase the price of gold bullion. For bearish investors, the UltraShort Gold ETF (GLL) attempts to increase in value by 200 percent daily if gold’s price falls.

The new ProShares ETFs charge 0.95 in annual expenses and will provide stiff competition for the PowerShares DB ETNs, which offer similar short and leveraged strategies on commodities and currencies. By paying an additional 0.20 percent in annual investment costs to own the ProShares ETFs, investors can avoid the credit risk of exchange-traded notes (ETNs).

Faith in the ETN marketplace was dramatically altered by the Lehman Brothers bankruptcy. Investors in the company’s three ETN products were left with an empty bag and lots of unhappy memories.

ProShares is the fourth largest ETF provider and manages 76 ETFs with $21 billion in assets.

The Claymore U.S. Capital Markets Micro-Term Fixed Income ETF (ULQ) is a short-term bond fund focused on investment grade debt. The fund has 51.40 percent exposure to money market instruments, 24.80 to government agency debt, 20.40 percent to federal government debt, and 3.40 to corporate debt. The fund’s annual expenses are 0.27 percent.

Ron DeLegge is the San Diego-based editor of