The ProShares Ultra Technology ETF (ROM) is the fund house’s enduring effort at proposing exposure to price action in Silicon Valley tech titans. Not unlike the Direxion Technology Bull 3x Shares ETF (TECL), the package has been positioned for some years now, and given trading volumes, assets under management and spreads, it too has known only measurably limited success. Counterparty risk continues to be a prominent feature of any ETF which resorts to over the counter (OTC) derivatives trading. This is substantively showcased in ROM, which requires OTC derivatives to generate leverage required to deliver 2X returns. It is equally this aspect which underscores why it only qualifies for tactical trading opportunities; this instrument does not really offer the quality characteristics for investors with longer holding periods. I provided a detailed overview of TECL which you can use for comparability purposes – details can be found here.

Source: Market Chameleon

Overview

ROM’s pricing (last quote at $64) makes it a little easier to access for all types of traders, yet this is debatable with the advent of fractional shareholdings proposed by most brokerage platforms. The ETF does provide a greater basket of risky assets (158 v 77) and would be characterized more as a traditional big tech offering, illustrated in its holdings. Assets under management stay comparably low which may underpin the relative little success this fund has had in catching investing community interest.

Fund performance ROM v TECL YTD

Source: ETF.com

Returns have been superlative, reflective of the mammoth run that big technology firms have had over the past decade and their growing weighting in both NASDAQ and S&P 500 indices. Management fees – which along with fund structure and composition – tend to be a bellwether of success, and are comparably high for passive investments. Elevated fees are a product of the efforts in engineering, managing, and administering customized derivative trades. The lion’s share of OTC derivative trades present in the ETF are DJ US technology index swaps offered by large investment banks such as Credit Suisse, UBS AG, Societe Generale, Goldman Sachs and JPMorgan.

Breakdown

ProShare’s ETF contribution is markedly more for tech purists than its Direxion counterpart. It continues to maintain meaningful holdings in Apple Inc. (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), and Facebook (NASDAQ:FB) while omitting the big payment firms such as Visa (NYSE:V) and Mastercard (NYSE:MA) present in TECL.

An overview of major holdings includes:

Source: ProShares Fact Sheet

The ETF trades presently at a price to earnings ratio of 35.41x and touts a volatility of 27.89%. Considerations on current changes to the US administration most likely need to be factored in when trading these assets. For example, concentration in ROM is less in the bigger holdings such as Apple Inc. and Microsoft. Such gearing could be a determining factor of risk-adjusted returns as a Biden government potentially looks to rebuilding a relationship with China after 4 years of trade war. This remains to be seen but could be a possibility given the messages of reuniting America (and presumably the world) that the President Elect has been telegraphing.

Implied price move data

Source: Market Chameleon

Notwithstanding, both ETFs maintain substantive holdings in Apple Inc. which needs to be taken into consideration, given the Cupertino firm’s exposure to Chinese customers and a heavily China focused supply chain. Separately, in previous valuation work I have completed, I also concluded that Apple Inc. is one of the overvalued big 4 stalwarts, an important element to consider when dealing with this passive investment vehicle.

Key Takeaways

  • ROM, like its Direxion counterpart, provides exposure to swings in risk-adjusted returns of big technology firms.
  • Slight nuances remain between the packaging of the two assets with ROM maintaining a more authentic North American big technology leaning where TECL takes up some exposure in big payment technology firms.
  • ROM relies on OTC derivatives trading to leverage its returns 2x – this presents risk for investors and costs for fund managers, which are reflected in the product’s hefty expense ratio.
  • ROM has been on the market for more than a decade but has not really taken off, possibly indicative of the benefits of holding the underlying assets, such as Apple Inc., Microsoft and Facebook, as opposed to holding the ETF.
  • The nature of the product – high leverage, counterparty risk – means that this asset is suitable for short-term tactical trading only.
  • ROM and TECL alike have a place in your trading toolbox, albeit limited by some of the products’ characteristics.

ETFs should remain a meaningful part of any investor’s asset exposure and as premised on Bloomberg ETF IQ, “there is an ETF for everything” – what is critical here is to understand underlying assets, ETF structure and term sheet specifics. ROM assuredly has its place in the ETF world but continues to be more risky, more short-term focused and arguably more volatile.

I remain bullish on the underlying asset classes. It is worth considering ROM for short-term trading opportunities only. The irony here is that ETFs are traditionally long-term passively managed investment vehicles – it seems, regardless, that by creating a larger product offering, ProShares has in fact devised a passive asset more suited to trading than to long-term holding.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I hope you enjoyed my overview of ROM. Please take a look at its counterpart (TECL) to get a more in depth view of this particular ETF segment. For detailed actionable ideas on tactical ETF trading, feel free to review my work on GUSH which looks at combining the ETF with options for short term position taking.





Source link