5 ETFs You Might Not Understand, De-Mystified

Investor demand and market conditions have created an atmosphere for  the availability of more complicated exchange traded funds (ETFs). Some of these might be especially confusing to investors.Here are five of the more complex ETFs available to investors today, along with explanations of their objectives and strategies, according to Michael Johnston for Seeking Alpha.

1. PowerShares S&P BuyWrite Portfolio (PBP): This ETF is meant for tracking the CBOE S&P 500 BuyWrite Index, which measures the rate of return of an S&P 500 covered call strategy. This strategy consists of holding a portfolio indexed to the S&P 500, and selling a series of call options, each with an exercise price at or above the current level of the S&P 500. The downside risk is hedged and the upside is limited. Why would you use covered calls? Investopedia notes that it’s often done when an investor has a short-term neutral view on the asset, and the strategy is also known as “buy-write.” 888Options also states that this would be used when an investor feels that a fund’s market value will see little range over the lifetime of the call contract.

2. ELEMENTS S&P CTI ETN (LSC): This exchange traded note (ETN) is linked to the S&P Commodity Trends Indicator, which applies a long/short strategy to 6 commodity sectors. This index takes long, short, or flat positions in each commodity based on the exponential average of the prices over the past seven months. In March, Claymore filed with the Securities and Exchange Commission (SEC) for an ETF based on this index.

3. SPDR Barclays Capital Mortgage Backed Bond ETF (MBG): MBG invests in investment-grade mortgage bonds, holds 14 securities, tracks 1,700 components and charges an expense ratio of 0.20%. The fund tracks the Barclays Capital U.S. MBS Index, which covers investment grade, U.S. agency mortgage-backed securities.

4. iPath Optimized Currency Carry ETN (ICI): Another ETN, this strategy is a play on the carry trade. It uses objective and systematic methodologies to capture returns available by investing in high-yielding currencies with the exposure financed by borrowings in low-yielding currencies. ICI is able to invest in currencies of the G10 countries, including the U.S. dollar, Japanese yen and the Australian dollar.

5. MacroShares $100 Oil Up (UOY) and $100 Oil Down (DOY): Issued in pairs, these ETFs (which are actually trusts) allow investors exposure to either upward or downward movements in light sweet crude oil futures contracts. As oil moves up or down, a corresponding dollar amount is transferred between the trusts - for example, if oil moves up $1, then $1 is moved to the up fund and taken from the down fund. Just as their predecessors had been, UOY and DOY are paired products that track the price movements of West Texas intermediate oil. The starting price for a share is $25, representing one-quarter of the benchmark oil price. As the price rises and falls, assets are transferred back and forth dollar-for-dollar between the Up and Down trusts. The termination trigger for the new funds is $185 a barrel.

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