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Not all Treasury ETFs are created equal

Forefront Advisory again put out a great piece of research on fixed income exchange-traded-notes. They trade much like stocks or closed-end funds, but in this case these  supposedly track Treasury bond yields.

Forefront noted this week that iPath launched 8 new ETNs that track the Treasury market and provide investors with an ability to bet on steepness or flatness of the yield curve. Since these are ETNs, tracking error should be minimized, but what exactly is being tracked is difficult to say. These products are innovative and fill a clear demand by investors. However, Forefront says “we are skeptical that these ETNs are panaceas for investor concerns about the bond market bubble and the tracking error associated with the inverse/leveraged funds like TBT.” These are derivatives-based products that can take, say, a long position in the two year Treasury and a short position in 10 Year Futures.  “To be clear – we are not saying these are bad products, we are merely warning investors that these are complicated products and investors are best to observe how they track versus individual investor expectations.”

Among Small Cap and Sector ETFs, Forefront says this:  The BHP Billiton $45-billion acquisition offer for Potash Corp reminded us of the opening bell ceremony for the Market Vectors–Agribusiness ETF (MOO-$45). Today this ETF has AUM of over $1.7 billion. Who knew way back in September 2007 that fertilizer could be so desirable? Back then, POT traded around $84 and MOO was at $40.50 versus today’s prices of $150 and $45, respectively.  While some may be excited by the action in MOO as a result of the battle for POT, we would remind investors that POT now represents 10% of MOO and any consolidation in the industry may not necessarily be best reflected in how this ETF is allocated. It is not likely that Deere (DE) or Monsanto (MON) will be acquired.  Furthermore, while rumors fly around Mosaic (MOS), this position is relatively small in MOO’s holdings. Therefore, investors buying MOO as a consolidation play, may actually be taking on a lot of risk for potentially diluted upside. Afterall, such an investment thesis ignores the possibility that (1) the deal falls apart (2) one of the other larger holdings doesn’t go down as a result of a potentially dilutive acquisition.

Thanks Dan and Dan at the Forefront Global ETF website (http://forefrontadvisory.com/index.php?link=14).

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