Comments on: The harm done by levered ETFs http://blogs.reuters.com/felix-salmon/2011/05/01/the-harm-done-by-levered-etfs/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: traduceri daneza romana http://blogs.reuters.com/felix-salmon/2011/05/01/the-harm-done-by-levered-etfs/comment-page-1/#comment-53352 Mon, 29 Sep 2014 13:52:14 +0000 http://blogs.reuters.com/felix-salmon/?p=8086#comment-53352 You could certainly see your enthusiasm in the paintings you write. The sector hopes for even more passionate writers like you who aren’t afraid to mention how they believe. Always go after your heart. “We may pass violets looking for roses. We may pass contentment looking for victory.” by Bern Williams.

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By: thiggins http://blogs.reuters.com/felix-salmon/2011/05/01/the-harm-done-by-levered-etfs/comment-page-1/#comment-31357 Fri, 30 Sep 2011 22:22:30 +0000 http://blogs.reuters.com/felix-salmon/?p=8086#comment-31357 Out of the universe of leveraged ETFs I can think of one very large and prominent category that has a valid purpose. The purpose is capital preservation, and the category is the leveraged inverse ETF.

First, understand my point of view. I have self-directed investments, but do not desire to allow trading to take over my life. I am not of the speculative mindset and do not try for lopsided killings. I would prefer to pick good stocks and buy and hold, but a bear market makes that a less-than-optimal strategy. Enter the leveraged inverse ETF as a hedging tool, doing the thing it was designed to do.

Once intellectually in command of the leveraged inverse ETF, I have new freedom. In a down market I am still free to assemble my portfolio of equities and conventional ETFs and hold it, rebalancing as my views of the long term gradually change. I can keep my shares and collect dividends. On up days I do not have to own any shares of my favorite leveraged inverse ETF. My thought is that I am always looking for a good reason to get rid of those shares, so I unload them as soon as things start looking bullish. Good days take care of themselves.

On a down day, one that I had a strong sense in advance was going to be a down day, I can load up on leveraged inverse ETFs and do better than just avoiding losses. Those days are pretty rare, but they do occur.

More frequently, in choppy trading, when the market dynamic is obscure, even baffling, buying into a leveraged inverse ETF can neutralize change in the value of my portfolio. I can just decline to make wagers. I can have no large gains or losses for the entire confusing, inscrutable day. If, on a particular day, I’m tired, or sick, too occupied with my day job or playing with the grandchildren, I can just set the market down, with fair safety, by neutrally hedging my portfolio first thing in the morning and selling out my position in an inverse leveraged ETF at 3:59 PM.

Case in point. Today, I couldn’t understand the market. Asia and Europe were down, but good news came from Michigan (consumer confidence), Chicago (purchasing managers) and Washington (personal income). So, things were unclear. Looked like it might go up, but ended up going down. I hedged out of the whole mess using ProShares SDS, and got some work done. Had I done nothing, I know I would have lost about 2.50%, because my portfolio tracks the S&P. As it stands I lost 0.08%, a very small amount. I sold every share of SDS at the end of the session. Monday might as well be years away.

I think leveraged inverse ETFs can reduce risk, ulcers and the amount of time you have to spend babysitting your portfolio, assuming that is not the thing you most love to do.

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By: dWj http://blogs.reuters.com/felix-salmon/2011/05/01/the-harm-done-by-levered-etfs/comment-page-1/#comment-26325 Fri, 06 May 2011 15:49:34 +0000 http://blogs.reuters.com/felix-salmon/?p=8086#comment-26325 I don’t even agree with AbeB here; it is simply not the case that an asset with positive convexity automatically “should never be held for longer than one day”. This is similar (though not identical) to buying puts; you’re protected from a really big drop, but you have an asset whose median path will be down. In a rational, risk-neutral martingale kind of world, TBT will drop with probability greater than 50%, but will exhibit positive skew, i.e. will rise, conditional on rising, more than it drops, conditional on dropping. If you’re going to argue that it’s inherently something that “should never be held for longer than one day”, you need to invoke something outside of that idealized framework.

I suspect, even in the real world, that it in fact is an appropriate instrument for certain reasonable investors, and that any fault to be found with it is that there are people buying it without understanding it. (More so than with most instruments, I mean.) I expect that, even in those cases, the risk profile isn’t egregiously different from what they’re pursuing; there may be an insurance product layered on that they don’t realize they’re paying for, but it’s reasonably priced. This is nowhere near as bad as the rolling futures gold ETF that has been discussed here before, which genuinely is a bad instrument for long-term holding for anyone in any circumstances.

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By: FelixSalmon http://blogs.reuters.com/felix-salmon/2011/05/01/the-harm-done-by-levered-etfs/comment-page-1/#comment-26206 Tue, 03 May 2011 23:02:46 +0000 http://blogs.reuters.com/felix-salmon/?p=8086#comment-26206 @SteveHamlin, they’re two sides of the same coin. Virtually any case of predatory and unethical behavior on Wall Street can be spun as naivete and ineptitude on the part of the investor.

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By: tmc http://blogs.reuters.com/felix-salmon/2011/05/01/the-harm-done-by-levered-etfs/comment-page-1/#comment-26186 Tue, 03 May 2011 13:21:20 +0000 http://blogs.reuters.com/felix-salmon/?p=8086#comment-26186 We (the people of this country) need to shut you financial people down. You’re all off in your own little worlds of financial tools that are nothing more than made up games to screw each other with and feel real smart about it. The markets are so convoluted with crap now that it can’t be fixed. It must be replaced.
tic-toc, tic-toc.

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By: MarshalN http://blogs.reuters.com/felix-salmon/2011/05/01/the-harm-done-by-levered-etfs/comment-page-1/#comment-26182 Tue, 03 May 2011 05:30:47 +0000 http://blogs.reuters.com/felix-salmon/?p=8086#comment-26182 Others have already pointed out reasons why leveraged ETFs are different from straight up leverage orders. It should also be noted that shorting, for example, is not always possible, and leveraged short positions sometimes run the risk of being cut when the shares can no longer be borrowed. Leveraged short ETFs will resolve that uncertainty.

On the point of decay – even though these instruments decay over time, over a short term period (say, a week) the decay is often negligible unless there are some truly massive moves. So I’m not sure if I agree that they should never be held for anything more than a single trading day, which is your argument Felix. A whole month, perhaps, but to say that they’re toxic beyond the trading day seems to me to be quite exaggerated.

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By: Derrida http://blogs.reuters.com/felix-salmon/2011/05/01/the-harm-done-by-levered-etfs/comment-page-1/#comment-26177 Mon, 02 May 2011 20:13:18 +0000 http://blogs.reuters.com/felix-salmon/?p=8086#comment-26177 As AbeB says, they pay better than equivalent straight leverage if: A. the underlying trades continuously up. or B. The underlying trades continuously down. In order to replicate them with straight leverage, you would have to be able to reinvest the additional MTM picked up on any day, which most margin programs do not allow you to do unless you trade all the way and out to pick up the cap gain (and generating trans costs). Alternatively, no matter how much the underlying goes against you, you can not lose your complete principal or be subject to a capital call.
However, explaining path dependency to most of the investors who buy these would be a hopeless exercise.

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By: AbeB http://blogs.reuters.com/felix-salmon/2011/05/01/the-harm-done-by-levered-etfs/comment-page-1/#comment-26175 Mon, 02 May 2011 17:35:50 +0000 http://blogs.reuters.com/felix-salmon/?p=8086#comment-26175 Dunno if the one day only rule is really valid. Leveraged ETFs lose value when they oscillate, which means they are awful long term bets, but as long as they are moving in one direction ONLY there is plenty of value in holding them for a few days. Holding them overnight is just a bet that the trend holds overnight (assuming it’s going the right way for you of course.)

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By: SteveHamlin http://blogs.reuters.com/felix-salmon/2011/05/01/the-harm-done-by-levered-etfs/comment-page-1/#comment-26174 Mon, 02 May 2011 14:51:58 +0000 http://blogs.reuters.com/felix-salmon/?p=8086#comment-26174 Felix – I think in your last paragraph you’re starting to get close to the underlying question, which The Analyst wrote, and KD echoed in his post and in these comments:

“Ultimately, the question we must ask ourselves is whether we want regulators to protect us from predatory and unethical behavior from issuers, brokers, and other Wall Street interests seeking to profit from illegal asymmetric information, or do we want them to protect us from our own laziness, naivete, and ineptitude.” – The Analyst

You should write a post on THAT topic, as it a foundational question for a lot of what you write.
Opinions on that point differ, and probably closely align with one’s larger political and economic worldview.

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By: KidDynamite http://blogs.reuters.com/felix-salmon/2011/05/01/the-harm-done-by-levered-etfs/comment-page-1/#comment-26167 Sun, 01 May 2011 23:08:20 +0000 http://blogs.reuters.com/felix-salmon/?p=8086#comment-26167 ps – Ditto Russ Abbott’s comment reply!

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