I will be speaking at iGlobal’s ETF conference in NYC on March 10th. If you happen to be in the area, it looks to be a solid conference.

ProShares launched two new Exchange Traded Funds (ETF) that short U.S. Treasuries. The ProShares Ultra 20+ Year Treasury (NYSEArca: UBT) is obviously based on the twenty year Treasury while the ProShares Ultra 7-10 Year Treasury (NYSEArca: UST) focuses on intermediate Treasuries. Both funds are structured to provide double the movement of the underlying index on a daily basis.

This is one reason why investors should tread carefully when using these products. These products are volatile and are better for traders, not long term investors. As an example of how these products work, let’s say the 20 year Treasury loses 10% of its value in 2010. This does not mean that the UBT offering will return 20% (double the loss) in 2010. It depends on what the 20 year Treasury does daily. If the 20 year rallies early in the year, the ETF could trail the benchmark considerably because the initial investment shrinks at the beginning of the year.

Day              Index  Return             ETF Return        Value

1                          +1%                            -2%               $98,000
2                          +1%                            -2%               $96,040
3                          +1%                            -2%               $94,119
4                          +1%                            -2%               $92,236
5                          -4%                             +8%              $99,615
6                          -1%                             +2%              $101,608

So the total return over this six day period was 2% (arithmetic not geometric). However, the return for the daily compounded ETF would have been 1.6%.

The other reason to tread carefully with this product is long term Treasuries may do well if we are truly in a debt deflation world. Of course, investment risk exists with all products, but the fact that everyone expects a rapid increase in bond yields raises concerns in my mind. Just look at Japan. Pundits have been calling for higher rates in the land of the Rising Sun for years.

Interesting read over at Index Universe from John Serrapere. It is a pretty honest assessment of the markets, but it isn’t the most hopeful. However, I agree with his line of thinking. As I have stated previously, too many people are using analysis and projections from the previous three recessions to base their projections for this one.

I think analysts are remiss if they are not using the Great Depression as their basis. This is not to say that we will endure the same outcome as that generation, but we are experiencing a downturn caused by extremely easy money and too much debt. What does alarm me with this downturn is we have even more debt than they did back then, and the Fed has created even more money than the Fed from yesteryear – primarily due to the gold standard being in place during the Great Depression.

Similar to the Great Depression, we are witnessing a massive amount of government intervention and stimulus in the markets, which didn’t work then. This government tinkering in the 1930’s coincided with the belittlement of capitalism and business owners, much like today. But, I could be wrong. Maybe we can get rich through debt and excessive spending (insert sarcasm here).

What say you?

The website, Index Universe, recently profiled Picket Fence Financial and described how we use Exchange Traded Funds (ETF) and options on those vehicles in client portfolios. Here is a link to the article:

http://www.indexuniverse.com/sections/features/5501-to-option-or-not-to-option-with-etfs.html