Risk: Simple as ONN, OFF

NEW YORK (TheStreet) -- There have been several themes of product development in the ETF industry in the last couple of years including funds that offer hedge fund-like exposure as a means of trying to offer portfolio protection. Along these lines there have been many products targeting some aspect of going long or short volatility to allow for hedging or speculation.

The latest products in this space are the UBS ETRACS Fisher-Gartman Risk On ETN (ONN) and the ETRACS Fisher-Gartman Risk Off ETN (OFF). The names Fisher and Gartman are for the designers of the indices underlying the funds, Mark Fisher and Dennis Gartman. As the funds' names imply, ONN is structured to do well during so called "risk on" trading environments and OFF is structured to do well during so called "risk off" environments. Many market participants will be aware that the recent volatility in the markets has been bifurcated into risk-on when the market is going up and the most volatile assets outperform and risk-off where the most volatile assets get hit hard as capital flees to investments perceived to be safer. The funds will each have 35 positions and charge a 1.15% expense ratio.

The two funds are essentially mirror images of each other. For example ONN will target a short position in 10-year U.S. T-Note CBOT Listed Futures of 16% while OFF will go long 10-year U.S. T-Note CBOT Listed Futures with a target weight of 16%. ONN will be long commodities like crude oil, various equity ETFs like Market Vectors Russia ETF (RSX) and currencies like the Australian dollar and of course OFF will be short these types of exposures in corresponding percentages. OFF will be long things like Japanese yen, Swiss franc and certain sovereign bonds. ONN will be short these "safer" holdings.

Bigger Picture

Zooming out a little, the various funds in this space that have come out over the years have been effective for the most part but also frustrating for investors. They've been effective in that they typically do what they are designed to do. The frustration comes in when investors don't fully understand the specific objective.

An example of this can be seen comparing the S&P 500 Volatility Index (VIX), known by its VIX ticker symbol and the iPath S&P 500 VIX Short Term Futures ETN (VXX). VIX is the spot index and VXX targets futures contracts on the underlying spot that expire in three months and there is a huge difference between the price action of the two. Year to date VIX is up 50% while VXX is only up 8.5%. VXX does what is supposed to but anyone not taking the time to fully understand what is intended has been disappointed.

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