Last week, UBS Global Asset Management launched a pair of exchange-traded notes (ETN) designed to play off the “risk-on/risk-off” trend: ETRACS Fisher-Gartman Risk Off ETN (NYSE: OFF) and ETRACS Fisher-Gartman Risk On ETN (NYSE: ONN).

The Risk On ETN tracks an index with a 150-percent long exposure and a 50-percent short exposure, resulting in a net exposure level that’s 100-percent long. The ETN uses a combination of exchange-traded notes and funds as well as some futures to achieve these exposure levels.

The fund is long on energy, equities, agriculture and metals. On the currency side, it’s long on the euro, the Australian dollar and the Canadian dollar and also holds short positions in Japanese yen and the Swiss franc. The fund will also be short on US bonds, British gilts and German bunds.

The fund can be expected to perform well when global markets are in a risk-on mentality since it is long on risk assets, while short on all of the traditional safe havens.

The Risk Off ETN pursues the opposite strategy by offering inverse exposure to the same benchmark index. It will be short on all of the traditional risk assets, while being long on all of the safe havens, so it should perform well in risk-off mode.

The Risk On ETN will charge an annual expense ratio of 0.85 percent, while the Risk Off ETN will charge 1.15 percent, largely due to the greater number of short positions it tracks. Still, given the complexity of the two funds, they’re relatively inexpensive compared to similar peers.

Over the past year, there have been a proliferation of these risk-based investment products and while assets have generally been slow to flow into these products, they’re clearly catching on with investors. Nevertheless, investors should remain wary of these products.

The construction of these products is predicated on the notion that risky assets will always move in concert, as will safe assets. But as the Great Recession demonstrated, even longstanding correlations can break down during market turmoil. That’s a real risk with these funds, particularly given their international flavor.

For example, let’s consider the funds’ bond positions. While US bonds should continue to offer investors a safe haven, that status could shift for German and British bonds depending upon how the European sovereign-debt crisis is resolved. If the resolution requires Germany to absorb the bulk of the expense, the value of bunds would likely decline. Meanwhile, gilts could get a boost from both the positive outcome of such a resolution and the fact that the UK’s financial involvement in such a resolution would likely be significantly less than Germany’s. In such a case, the two funds wouldn’t necessarily perform as expected.

That’s just one example of why these funds might create a false sense of security. But they might be useful for sophisticated traders who understand the risks and would use these funds as tactical trading tools. For the average investor, however, we suggest adhering to the time-tested strategy of holding a well-diversified portfolio with appropriate weightings tailored to your risk tolerance rather than delving into these types of funds.

What’s New

State Street Global Advisors made two new additions to its SPDR family of exchange-traded funds (ETF) with the launch of SPDR Barclays Capital Investment Grade Floating Rate ETF (NYSE: FLRN) and SPDR Barclays Capital Short Term Treasury ETF (NYSE: SST).

While floating-rate debt has become a bit expensive lately, it remains a popular asset class among many investors.

In the current low interest rate environment, rates can’t move any lower and it’s only a matter of time before they finally move higher again. That makes floating-rate debt attractive because it moves in tandem with benchmark rates.

SPDR Barclays Capital Investment Grade Floating Rate ETF tracks a basket of around 320 floating-rate securities. Its portfolio primarily holds corporate debt, though it also holds agency bonds, most of which are priced according to the 3-month LIBOR rate. And while the index is comprised of dollar-denominated debt, there are a number of international issuers in the mix. The fund is expected to yield around 2 percent.

The fund has a low expense ratio of 0.15 percent, but it will likely have difficulty accumulating assets since there are already two other floating rate ETFs available: iShares Floating Rate Note Fund (NYSE: FLOT) and Market Vectors Investment Grade Floating Rate Bond Index Fund (NYSE: FLTR). Even so, it should attract interest from due to the SPDR brand recognition and its sponsor’s skillful marketing efforts.

And though we’d steer clear of SPDR Barclays Capital Short Term Treasury ETF at this point, that has nothing to do with the ETF itself.

The fund’s index tracks all outstanding Treasury debt with remaining maturities of between one year and five years with $250 million or more of outstanding face value. Again, interest rates on the short end of the yield curve are already at rock bottom, so the principal values of short-term Treasuries will fall when rates finally rise again. On the other hand, we’ve been concerned about this possibility for nearly two years now, while plenty of investors have continued to profit from these securities. Still, we’d approach these securities with caution.

The ETF charges a 0.12 percent expense ratio, which is near the median cost in its category. As we mentioned previously, the ETF sponsor’s marketing machine and name recognition should attract assets to this fund.

Portfolio Roundup

Our Global ETF Profits Model Portfolio gained 3.3 percent last week as the markets moved back into a risk-on mode, at least temporarily.

The news that global central banks were taking coordinated action to improve dollar liquidity for eurozone banks was a huge boost for investor sentiment, pushing iShares MSCI Germany (NYSE: EWG) 5.4 percent higher and iShares MSCI France (NYSE: EWQ) more than 6 percent higher.

Our energy-related investments also got a huge boost due to the news that China’s central bank is loosening its policy on bank reserves in a move to stimulate its economy. iShares Dow Jones US Oil Equipment Index (NYSE: IEZ) gained 8.1 percent on the week and Market Vectors Coal (NYSE: KOL) gained 8.8 percent.

Unfortunately, this recent burst of optimism is likely to be short-lived. European leaders are currently meeting to discuss French and German proposals for greater fiscal unity within the European Union, a highly contentious issue that will involve individual nations sacrificing some degree of sovereignty. We expect an ultimately positive result from these discussions, but in the near term there could be greater market volatility as various European leaders make positive and negative statements on the issue to the press.