Most leveraged funds reset their leverage daily. Others use monthly, quarterly, or rules-based reset intervals. Although disliked by many investors, leverage resets prevent products from losing more than 100%. A small handful of products never reset their leverage. These “no-reset” products must have other means of preventing financial ruin, and early termination triggers are used to initiate closure of these products before their value reaches zero.
The iPath Short Enhanced MSCI EAFE ETN (MFSA) is a no-reset product, and it hit an early termination trigger on Tuesday (9/10/2013) when its intraday indicative value fell to $37.50. MFSA’s delisting will occur after the market closes on Monday (9/16/2013), and noteholders will receive the automatic redemption value of $37.50 per ETN.
MFSA has been a perpetual member of ETF Deathwatch and is a near textbook definition of a Zombie ETF. It has only had one trade this year when 200 shares changed hands back on June 12. Today, it is quoted with a bid of $18.22, an ask of $54.57, and has about $2.6 million in assets. Given the extreme illiquidity of this product, this is one case where investors will probably be better off going through the termination process. By doing so, you are assured of getting $37.50, whereas selling with a “market order” will only get you $18.22 for the first 100 shares and $17.65 for the second 100 shares.
Since $37.50 is below the lowest price ever recorded for MFSA, all owners are sitting on a loss. If you want to try to sell your position at a better price to some unsuspecting counterparty, then be sure to use a limit order above $37.50, or else you will be the patsy in the trade.
Disclosure covering writer, editor, and publisher: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.