Greedy on the Dollar? See This Leveraged ETN

If you’re steadfast in your belief about the strength of the dollar — now and into the near future — then you should consider looking at PowerShares DB 3x Long U.S. Dollar Index Futures ETN (UUPT).

However, before you jump in, there are several things you need to know about this exchange-traded note (ETN). Some of it’s good news and some of it’s bad news, but it’s information you can’t be without if you’re considering an investment.

UUPT Overview

UUPT offers leveraged exposure to Deutsche Bank Long U.S. Dollar Index Futures Index — Excess Return (300%). Of course, it’s not going to say “Potential for Excess Loss” at the end. That wouldn’t be good business.

While UUPT has performed exceptionally well for years as a leveraged ETN, without any swift and major declines, any leveraged ETN (or ETF) presents significant risk. In fact, UUPT operates on month-over-month exposure, which PowerShares notes as a risk on its website:

“The PowerShares DB US Dollar Futures ETNs may not be suitable for investors seeking an investment with a term greater than the time remaining to the next monthly reset date and should be used only by knowledgeable investors who understand the potential adverse consequences of seeking longer-term leveraged or inverse investment results by means of securities that reset their exposure monthly.”

As far as performance goes, UUPT has appreciated 7.13% over the past three years, and 38.02% over the past year. Therefore, anyone who was frightened to enter the position due to the above warning missed out on an opportunity. (For related reading, see: Leveraged S&P ETFs: Beware of Volatility.)

Getting back to how UUPT works, it can get a little confusing. The simplest version is that it has leveraged exposure to the the USDX Futures Index (USDX) and tracks the performance of the dollar versus the Euro, Japanese Yen, British Pound Sterling, Canadian Dollar, Swedish Krona, and Swiss Franc. But it’s not an even spread. And this is a key point. Here’s the exposure breakdown:

  • Euro: 57.6%

  • Japanese Yen: 13.6%

  • British Pound Sterling: 11.9%

  • Canadian Dollar: 9.1%

  • Swedish Krona: 4.2%

  • Swiss Franc: 3.6%

That being the case, you want to pay most of your attention to the Euro. And here’s what you need to know about the Euro: There are doubts about its sustainability. Switzerland recently sent a clear message indicating its lack of confidence in the Euro by abandoning the link of its Swiss Franc to the Euro. This means that Switzerland likely saw the Euro eventually failing and it didn’t want to go down with it. But most importantly for U.S. dollar bulls is that the added pressure on the Euro will add strength to the U.S. dollar, simply because it will be seen as a safe haven.

As far as the Japanese Yen goes, the Bank of Japan is spending 80 trillion yen per year for an asset-purchase program. It won’t stop this program until inflation reaches 2%. In other words, the odds of the Japanese Yen showing strength against the U.S. dollar at any point in the foreseeable future are low. (For related reading, see: A Look at the UWTI Leveraged Oil ETN.)

Key Metrics

As you can see, UUPT offers risk and significant upside potential. Whether to initiate a position is up to you, but you should have all the most important information at your disposal. Therefore, consider the following key metrics for UUPT:

Net Assets: $ 19.47 Million

Yield: N/A

Inception Date: May 23, 2011

Expense Ratio: 0.84%

Average Volume: 42,202 (low)

Leverage Reset Frequency: Monthly

The Bottom Line

The U.S. dollar is likely to continue its ascent vs. the Euro and Japanese Yen. Therefore, UUPT could be a profitable investment. That said, as a leveraged ETN with a monthly reset, it’s an investment you will want to watch carefully. Please do your own research prior to making any investment decisions. (For related reading, see: Top 5 Reasons to Keep Leveraged ETFs to the Pros.)

Dan Moskowitz does not have any positions in UUPT.