Comments on: How to make ETFs less risky http://blogs.reuters.com/felix-salmon/2011/10/25/how-to-make-etfs-less-risky/ 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: kaylabi http://blogs.reuters.com/felix-salmon/2011/10/25/how-to-make-etfs-less-risky/comment-page-1/#comment-36078 Thu, 16 Feb 2012 17:13:19 +0000 http://blogs.reuters.com/felix-salmon/?p=10712#comment-36078 Golden Networking has created an instructional DVD for executives and professionals in high frequency trading, entitled, “The Speed Traders Workshop 2012”. This 4-disc DVD set walks professionals and non-professionals through the main issues, challenges and opportunities practitioners face to consistently capture alpha using fast computers. The DVD uses non-mathematical terminology and provides insights to successfully implementing speed trading while avoiding minefields. It is the ideal reference for professionals in the world of alternative investments. Visit http://bit.ly/znIl3E for more information

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By: kaylabi http://blogs.reuters.com/felix-salmon/2011/10/25/how-to-make-etfs-less-risky/comment-page-1/#comment-36077 Thu, 16 Feb 2012 17:12:49 +0000 http://blogs.reuters.com/felix-salmon/?p=10712#comment-36077 Golden Networking has created an instructional DVD for executives and professionals in high frequency trading, entitled, “The Speed Traders Workshop 2012”. This 4-disc DVD set walks professionals and non-professionals through the main issues, challenges and opportunities practitioners face to consistently capture alpha using fast computers. The DVD uses non-mathematical terminology and provides insights to successfully implementing speed trading while avoiding minefields. It is the ideal reference for professionals in the world of alternative investments. Visit http://bit.ly/znIl3E for more information

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By: DaveNadig http://blogs.reuters.com/felix-salmon/2011/10/25/how-to-make-etfs-less-risky/comment-page-1/#comment-32669 Wed, 02 Nov 2011 16:14:17 +0000 http://blogs.reuters.com/felix-salmon/?p=10712#comment-32669 The thing that always seems to get lost here is that ETFs actually represent a tiny amount of trading compared to the volume of the underlying. S&P 500 ETFs currently hold 1% of the market cap of the S&P 500. Index funds in general however hold over 10%. That’s a trend that started back in the ’70s and has never waned.

Correlations are up, yes. But they’re also up between all asset classes, not just within large cap stocks. Are you suggesting ETFs are to blame for the increased correlations of Gold and Bonds too?

Finally, don’t forget that far more notional value is getting traded in the futures market than in ETFs OR the underlying, day in and day out, and that really drives the prices of the underlying. It was futures trading, not ETFs, for instance, that caused the infamous “flash crash.”

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By: TFF http://blogs.reuters.com/felix-salmon/2011/10/25/how-to-make-etfs-less-risky/comment-page-1/#comment-32357 Wed, 26 Oct 2011 13:26:44 +0000 http://blogs.reuters.com/felix-salmon/?p=10712#comment-32357 “Models work right up until the point they don’t.”

Models work until they come into broad use. Then they stop working. The consensus is thus always wrong.

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By: haggers http://blogs.reuters.com/felix-salmon/2011/10/25/how-to-make-etfs-less-risky/comment-page-1/#comment-32351 Wed, 26 Oct 2011 04:01:51 +0000 http://blogs.reuters.com/felix-salmon/?p=10712#comment-32351 If ETFs are causing securities to become mispriced, then delta-neutral arbs must exist aplenty. These are lovely when you can find them in liquid markets. Lever-up, put on the trade, profit. What’s not to love?

Actually, it’s quite a bit more likely that no such arbs exist. Any time someone claims the market is mispricing an asset, you have to ask how they came up with their valuation. Most of the time, it’s the valuation model, not the market that’s wrong. I think these two guys from the Kauffman Foundation are just cranky that the foundation’s endowment is getting its face ripped off in this market. It can’t be their models, so they have to find something to blame.

Real life is heteroskedastic. Models work right up until the point they don’t. Correlations go through cycles, too. There’s nothing you can do, except adjust. I mean, anyone who trades knows this instinctively.

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By: Hayes http://blogs.reuters.com/felix-salmon/2011/10/25/how-to-make-etfs-less-risky/comment-page-1/#comment-32345 Wed, 26 Oct 2011 00:06:44 +0000 http://blogs.reuters.com/felix-salmon/?p=10712#comment-32345 “First do no harm.” Let’s make sure that there is a real problem before we try to fix it.

To restate earlier comments, to blame ETFs is to blame a purely technical factor when there are obvious huge fundamental uncertainties in play which affect the whole market. And even on the technical side, there are also enormous futures markets, which probably have more effect on the market as a whole than ETFs. It takes much more than finger-pointing at a couple of graphs to make a convincing case here.

There may be smaller sectors where ETFs do have an effect (Gold?), but even then that does not make it in any way wrong for correlations to rise when there are market-wide or sector-wide effects.

Finally, just because things are different now from the past does not mean that the past was right and the present is wrong. Maybe the markets were more inefficient in the past. Is the time axis on that graph meant to imply that the rigged market of the 1920s is something we should aspire to?

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By: KidDynamite http://blogs.reuters.com/felix-salmon/2011/10/25/how-to-make-etfs-less-risky/comment-page-1/#comment-32343 Tue, 25 Oct 2011 22:35:59 +0000 http://blogs.reuters.com/felix-salmon/?p=10712#comment-32343 @Dr_Stonewater – talking about rebalancing arbs, I believe Felix was referring to those who make money by trading the stocks that the ETFs will have to buy and sell in their quarterly/annual rebalancings.

you’re talking about NAV arbs – and that’s another good point – you WANT arbs to keep prices in line.

(you want “Rebalancing arbs” also, in fact, to take the price risk for you – they buy the stocks and sell them back to the ETF, lessening the ETF trading impact)

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By: KidDynamite http://blogs.reuters.com/felix-salmon/2011/10/25/how-to-make-etfs-less-risky/comment-page-1/#comment-32342 Tue, 25 Oct 2011 22:33:44 +0000 http://blogs.reuters.com/felix-salmon/?p=10712#comment-32342 ps – Felix: “rebalancing arbs” don’t trade the ETFs – they trade the underlyings. so your punitive tax wouldn’t impact them.

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By: Dr_Stonewafer http://blogs.reuters.com/felix-salmon/2011/10/25/how-to-make-etfs-less-risky/comment-page-1/#comment-32341 Tue, 25 Oct 2011 22:29:50 +0000 http://blogs.reuters.com/felix-salmon/?p=10712#comment-32341 Mr. Salmon – you wrote that your feeling was that a nominal Tobin tax will drive away day-traders and rebalancing arbs. I concur with the intent – but won’t this stymie liquidity in the ETFs, causing bid-ask spreads to widen? Then the buy-and-hold investors “that ETFs are good for” will end up buying at a price other than net asset value – sort of like an load fund where the load is extensible, variable, and not terribly transparent … Why do those buy-and-hold investors care about short-term correlations / volatility anyway, if they are truly buy-and-hold? Perhaps human nature dictates they are not so buy-and-hold after all …

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By: KidDynamite http://blogs.reuters.com/felix-salmon/2011/10/25/how-to-make-etfs-less-risky/comment-page-1/#comment-32339 Tue, 25 Oct 2011 21:54:33 +0000 http://blogs.reuters.com/felix-salmon/?p=10712#comment-32339 well said, Greycap… I would have just said “correlation is not causation” – without the pun intended on the correlation of high correlations…

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