This picture has nothing to do with this post but still kind of neat, it is from Switzerland and will probably get forwarded to you soon if it has not been so already.ProShares finally listed its ultra sector ETFs. They go double long or double short 11 sectors or sub-sectors, you probably know this by now.
I wrote about a possible market neutral trade involving these a while back and I had an article run on TSCM over the weekend that captures the idea with more detail.
The basic idea, using the utilities sector as another example would be to buy, say, $20,000 into Wisdom Tree International Utilities Fund (DBU) and $10,000 into ProShares Ultra Short Utilities (UPW). Conceptually you are only taking spread risk which should be much less than market risk.
Since DBU's inception it has outperformed iShares Utilities (IDU) by a surprising 800 basis points. The reason for this chart is that IDU and UPW track the same index such that $2 in IDU would be offset by $1 in UPW, save for the tracking error.Using the dollars above DBU would be up $3200 and UPW might be down $1600. The dividend in that time from DBU might be 0.92% or $184. In this scenario (there are plenty of caveats) the return might be $1784 for the $30,000 or 5.9% for about one calendar quarter. Another nugget is that the double short ETFs could pay interest because they use derivatives to create the exposure and have cash that earns interest.
The move in DBU versus IDU is larger than what I thought could be possible when I first wrote about this. I think if the trade had been placed as theorized back in October it would need to be rebalanced fairly soon, depending on how true the holder want to be toward market neutral.
This type of trade is certainly not going to be a market beating trade very often, something to keep in mind. The double short funds have only been trading for five minutes so we can't be 100% certain they will do what they are supposed to, not that I doubt them but the MacroShares is a good lesson about not jumping in to a new fund right away. There will likely be some sort of tracking error too. Also the goal of UPW is double the inverse on a daily basis so over a year it may not look like twice the inverse.
Obviously this theory could also lend itself to pairing an individual stock and a double short fund too.
Much to my amusement I got an email from someone at ProShares who liked the concept, go figure.
8 comments:
I have a question unrelated to the article. What do you think about powershares in general and their green etf cleantech (PZD). Thanks for your help.
This is what screws me up.
Lets say that I am going to retire in 5 years with 2 million at age 60.
I want to take 7% or 140000 out annually. I will also increase that amount by 5% per year. If my portfolio averages a 5% return how long can I live?
What if it returns 6%?
I think it is more "real world" to make these assumptions to determne when the money will ru n out.
Always be sure to have enough for a gun and a bullet, just in case.
Thanks
to the 753 anon,
i don't say this very often; you need a financial plan. either pay someone for one or do it yourself but get one. If you think you have one, I'd say your question belies that you don't.
Taking just 7% out each year ( no 5% increasing ) :
5% Return = 25.2 years to run out
6% Return = 32.6 years to run out
"ProShares finally listed its ultra sector ETFs."
I just checked the Profunds website and they weren't listed. I'm interested in seeing what they have to offer. Advice?
not profunds.com
proshares.com
HTH
I was aware these were in the pipeline but I must not have been paying close enough attention. I wasn't expecting that they were all going to be "Ultra" (double). No "regular" short sector funds listed (or planned)?
OT: Roger you might have already covered this..re: GII..the new global infrastructure etf. The concept of this appeals to me, and when a new etf comes up that has merit for me I like to plug into my data base another ticker that can be used as proxy. Do you have a suggestion of something that I can watch trade to see how closely the two moved together? thx.
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