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During the past few years as the ETF menagerie was populated by increasingly unlikely and exotic creatures many investors never considered how the mechanics of the products they were purchasing would react to the kind of market stress we are facing today.

The Ultrashort Proshares Dow 30 (DXD) is a prime example. Many investors were taken aback today as they saw their leveraged short trade vehicle begin to positively correlate with the underlying index while options trading halt for the name –not realizing that they were receiving a special short term gain distribution due to the fact that DXD (as well as its ultra short siblings like SDS) are not actually holding short positions in the underlying securities, but rather are long OTC total return swaps that provide synthetic short exposure. As the system deleverages some of these winning trades held by these ETFs and others are being unwound and accrued interest is being realized creating extraordinary one time distributions.

I think that ETFS are an excellent way for investors to access the markets and I think that they will remain a popular product, but in the coming years I expect that some of the more exotic species that came to market during the boom will go the way of the dodo.

Andrew Barber
Director