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22 comments:
Yawn...
A wise philosophy that applies to lots of investing things beyond etns these days.
exactly my feelings on ETNs. Has there ever been a definition of where ETNs fall on the "who gets paid" list when Barclay's goes under?
Roubini's latest... At least a 20% declne in equity prices...
http://www.bloomberg.com/apps/news?pid=20601087&sid=aAZEkBMAM9xY&refer=home
FWIW - from Grantham's latest quarterly letter (published online yesterday): http://www.gmo.com
"Slowly and carefully invest your cash reserves into global equities, preferring high quality U.S. blue chips and emerging market equities. Imputed 7-year returns are moderately above normal and much above the average of the last 15 years. But be prepared for a decline to new lows this year or next, for that would be the most likely historical pattern, as markets love to overcorrect on the downside after major bubbles. 600 or below on the S&P 500 would be a more typical low than the 750 we reached for one day."
"But, we are deep in the pickle jar, and it seems likely that, in terms of economic pain, 2009 will be the worst year in the lives of the majority of Americans, Brits, and others."
Thanks for the link to Grantham's latest quarterly report. It is well worth the read.
A few other interesting comments:
"In fixed income, risk finally seems to be attractively
priced, in that most risk spreads seem attractively wide. Long government bond rates, though, seem much too low. They reflect the short-term fears of economic weakness and the need for low short-term rates. We would be short long government bonds in appropriate accounts."
"As for commodities, who knows? There were a few
months where they looked like a high-confidence short, but now they are half-price or less, and are much lower- confidence bets."
"In currencies, we know even less. It is easy to find
currencies to dislike, and hard to find ones to like. There are no high-confidence bets, in our opinion."
"For the long term, research should be directed into
portfolios that would resist both inflationary problems and potential dollar weakness. These are the two serious problems that we may have to face as a consequence of flooding the global financial system with government bailouts and government debt."
"Under the shock of massive deleveraging caused by the equally massive write-down of perceived global wealth, we expect the growth rate of GDP for the whole developed world to continue the slowing trend of the last 12 years as we outlined in April 2008. Since this recent shock overlaps with slowing population growth, it will soon be widely recognized that 2% real growth would be a realistic target for the G7, even after we recover from the
current negative growth period. Emerging countries are, of course, a different story. They will probably recover more quickly, and will continue to grow at double (or better) the growth rate of developed countries."
The Grantham report is scary. For those who haven't read it yet, I encourage you to do so.
The part that especially jumped out at me was the part about the interplay between asset value drops and high leverage, at a national level.
lol. Deep in the pickle jar, eh? I think he probably had to choose his words carefully.
An excellent article by Morningstar regarding the pitfalls of both leveraged and inverse ETF's. Paul also recently attended the ETF conference and refers to it in the article...
http://news.morningstar.com/articlenet/article.aspx?id=271892&pgid=etfarticle
In the M* article that anon 12:15 posted, I found this excerpt rather concerning:
"I recently returned from the 'Inside ETFs' conference, which is widely attended by ETF industry insiders and financial advisors, and I was shocked to learn how many people have a misconception as to how these funds work. And this sampling was not of novice day traders--these are professionals and financial advisors. They research a product before they dispense advice or buy something."
Buyer beware as it appears several advisors have no clue regarding the proper use of these leveraged/inverse ETF products. The morale of the story is that they should never be held more than one trading day and one is better off using a margin account for leverage.
Perhaps Roger can elaborate on his past experience with using SDS as a hedged position. IMO, if one is looking to hedge their portfolio with a short ETF than the use of SH is much more efficient at tracking the hedge over long periods of time than using a leveraged short position such as SDS. The latter should be used for day trades or 2 day trades only.
i have the GMO PDF open in another tab to read to today.
a friend on FaceBook sent me that M-Star article. I never thought about using any of the narrower products for clients. for the last year SDS is up 30% versus down 40% for the S&P 500. additionally it has paid out a lot in divs which maybe not idea for taxes does add to the total return. finally anyone still holding after all that time (I do not own it anymore) now has more of their portfolio hedged as it would have grown in relation to the rest of the portfolio.
Maybe Justice was referring to me, I specifically said in my panel I bought it at about a 2% weight and it grew to about a 4 or 5% weight. I think I was consistent all the times I wrote about SDS saying over the longer term it may not do what is expected, but I do think it can capture the general effect, but on days the market is down a lot it does what it is supposed to.
In the quote you left there was no mention as to whether the clueless advisors use the funds. If an advisor doesn't have a clue but does not use them then who cares? I just skimmed the article again to be sure and he never says advisors using them are clueless just some of the folks in attendance.
Morningstar's ETF analysis has been bad from the get go, I don't know if they are now starting to get it or not if if they are now starting to get it they are about six years late to the party and it would be reasonable to question whether they have a conflict of interest in that they get paid by OEF fund companies.
Just as I was about to launch this a question came in about SH v SDS. On days the market goes down a lot SDS will obviously be more effective so I prefer it, when I want to hedge over the single short.
Roger- for my clients I use SH for hedging purposes and as you know will track better for trades over a day versus SDS. Out of curiosity, if you target a 2% weight for SDS, why not simply target a 4% weight and use SH? The total exposure to the market is the same however SH will be much more efficient if the position is held longer than a single trade day.
I would also add to the above post that one's risk adjusted return would also be much improved versus using a leveraged SDS (if held more than a single day).
two reasons it leaves more cash for whatever might come up in terms of the client or being opportunistic and SDS and SH are the same thing. They use futures, swaps and the like to create an effect. as a matter of philosophy anything can malfunction and blow up. as extremely unlikely as that is WCOM and Enron taught me that. 2% is obviously less than 4%. With SDS I have less money in something that is not a straight forward common stock or index fund.
my feeling from the start was the double short was more efficient. perhaps someone could disagree with that but in 2.5 years for SDS' trading i at least have a point.
This may be a stupid question, but why don't the ETF makers create inverse products that track better over longer term, and target them to longer-term investors? Is it not possible?
IMO leverage makes no sense...My simple explanation is that if one adds leverage you have extra costs. Thus that means you are earning less than the market's required risk premium but taking on more market risk.
Also note that you still have the problem of volatility impacting the compound returns, and when you add up the costs the effect is significant.
I believe there are a couple of commodity related ETPs that target one month. Never looked at them, don't know who issued them, don't know if they are ETFs or ETNs but assuming they did list then maybe it can be replicated for equity indexes.
Leverage makes no sense? Did you pay cash for your house? Leverage is just like anything else, too much of it and there will be problems.
Morningstar's report is a nice example of how to be factually correct but largely irrelevant because the alternative uses of SDS were not sufficiently addressed particularly within the context of damping portfolio volatility.
I began using SDS after its first quarter results were in; getting a sense of real-world performance as well as providing some time for management to iron out wrinkles is good.
Understood what the product was before investing; read the prospectus and did some research on the instruments SDS and similar funds use (it seemed clear they were not running their own trading desk but were using custom, third-party contracts).
It has performed generally as expected since, reducing beta with a concomitant increase in risk-adjusted returns; I would not have been badly upset if its ROI had been zero over the past couple years but certainly didn't complain at the 22% it did return.
I have no problem holding it during extended periods of higher volatility nor should anyone else who uses it for that purpose. 2X leverage seems about right, a bit more divergence is acceptable given the other purposes I have for cash; divergence at 3X may be too large but am investigating those instruments in case it remains within reason (doesn't actually wind up increasing portfolio beta rather than damping it).
Basically the false dichotomy between "traders" w/ their tactics and "investors" w/ their tactics needs to go away because it has cost a lot of people a lot of money; e.g., even an investor with the longest of time-horizons should have a sell discipline to accompany their buy discipline and, these days, a hedge discipline too for times they want to avoid doing either. JMO
people that dismiss the double (and triple) inverse ETF/ETN are as guilty as the ones that do not understand it.
Daily compounding cuts both ways. If the underlying moves in a smooth trend line then the daily compounding will amplify the move of the leveraged instruments.
For example, USO went down from $110 in mid july to around $30 this week.
Meanwhile, DTO, the double inverse, went from around $24 to $180 this week (it closed Friday at $155).
That's around 750% in several months.
DEE had similar returns. It all depends on the underlying. Commodities tend to move in smoother trends over long periods of time.
Roger, i believe DXO is one of the ETNs that target monthly tracking instead of daily tracking.
well put RW, thanks for the tcker Sami
Nice post Roger.
1. It's warm compared to the last video. Rogers only wearing a tshirt and not a sweater.
2. Totally agree on the ETNs. I'd like the Bear Stearns Alerian MLP ETN (BSR) because its unleveraged. It's underwritten by JPM, but its still an ETN. I use a CEF instead that does the same thing. I account for the leverage in the allocation.
3. This is the same argument I was having with someone over whether to put CDs in a state insured credit union (CU) versus a NCUA insured CU. NCUA is the Federal CU equivalent of FDIC.
There is no point in taking a risk that literally brings you no benefit. Shit happens...
Paul
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