ETP Utility and Silliness

First utility. IndexIQ is coming out of the gate as a bit of an enigma. The new Merger Arbitrage ETF (MNA) at first glance seems odd to me. There have been several articles already that have ripped it up for not really being an arbitrage product and I will say I don't get why shorting the broad market against long positions in takeout targets is the best way to go but clearly they did not get a crappy result from the backtest and decide "well even though the backtest is lousy we'll run with it anyway."

But that is not what I wanted to talk about. IndexUniverse has reported that IndexIQ has filed for a bunch of single country small cap ETFs. The countries included are Australia, Canada, Hong Kong, Indonesia, Malaysia, Singapore, South Korea and Taiwan. They also filed for global small cap industry funds; agriculture, natural gas, crude oil and gold (Market Vectors may have beaten them to the punch on that last one).

While I always add the caveat that until a fund lists the filing doesn't mean much but these are interesting ideas for two reasons. First is the obvious which is access to parts of the market that are not easy to get to. Small caps in Malaysia? An evolving dialogue on this site has been the opening up of "new" parts of the market to do it yourselfers giving the chance for more diverse and sophisticated portfolios. These types of funds are exactly what I'm talking about.

The other thing that these funds do is provide starting points for researching names for people willing to pick individual stocks. I have talked before about going to the websites of foreign exchanges as being a way to learn about what companies are there but that is not always easy to do. Here's hoping IndexIQ follows through with these. This seems to have the potential to offer more value than 15 different ways of getting an absolute 6-8% return.

Now for some silliness. Barclays has launched a bunch of ETNs that are too complex to explain briefly so I will let IndexUniverse to the talking. But they offer different sorts of levered exposure to the S&P 500 both long and short. They give a payout based on where the index stands five years from now and you are paying for the leverage as you go. The important thing to realize is that they are nothing like the ProShares or Direxion funds.

These strike me as being very similar to brokerage house products that offered some exposure to the market but protecting principal along with several other moving parts.

I am making no attempt to sort these out. I am quite certain that the science behind these things is very compelling but it doesn't take much experience in the industry to realize the most complex of products often turn out very badly. These things should make an individual investor run screaming from the room with his hands flailing above his head.

I will be truly shocked if these resonate at all with retail investors. I can envision some sort of institutional trade off of some sort of unintended byproduct that I am not smart enough to see ahead of time (to be clear something along these lines would not be my type of trade).