Howdy,
Realizing many may be traveling during the holiday; I am going to throw this question(s) to the board and hope to obtain some replies over the next few days.
As our fund holdings are continuing to have unprotected investment intercourse and that it is most apparent that their are many investment diseases lurking about; I/we at this house, intend to set aside some time to study a bit more regarding eft's and index funds. We do have brokerage access via Fidelity with our IRA's and are considering a set aside % of monies that could be used to offset market moves.
We are fully aware of the potential risks and rewards from this area, but are content we may be able to operate in this area of eft's and feel comfortable.
I am familiar with a number of sites related to eft's and there is more than enough to study; and also whatever one may trip across with a good search of the topic.
---1. Kaspa noted the purchase of index funds that are inverse and 2x or 3x. I understand the "inverse" and the "x" concept and the relationship to the market place. However, not unlike Fido index funds: I presume the sale of "all" index funds operates in the same fashion as a traditional mutual fund, that upon sale of the index fund; the "final" price is the closing price at the end of the market day, yes ???
---2. As to eft's. Aside from one choosing what area they want to be involved with; what are issues or to watch for items with these?
a. We are aware of the numerous vendors....do their fees for a similar eft type vary much?
b. What about the buy/sell spread OR any discounted value to be aware of existing?
c. Etf's would appear to be the way to move monies more freely and timely; and not be held to a market close condition.
I may hop back here later tonight to add more thoughts or questions; but right now I am the dinner fix-it person and must be away.
I thank you for your time and efforts.
Comments
Ameritrade offers NTF/no minimum on the Rydex inverse mutual funds and they are okay with short-term trading.
Personally, I'd be very careful w/2 or 3x inverse funds, as a little does go a long way, especially with a portfolio already fairly conservative. If you do go that route, I'd consider going with the Rydex or Profunds NTF funds, as trying to achieve a balance within a portfolio takes a little bit of trying.
Rydex Target Beta funds generally price twice daily, not once. That is, unless there's a short trading day (like this Friday), when they only price once. Or unless you're trading through a brokerage that won't give you the mid-day price. And these funds (and I suspect a fair number of other ones) tend to have earlier cutoffs. You can't even go by the fund family - looking at the Rydex link, I see cutoffs for web trading at 3:55 (e.g. for Inverse Dow 2x), at 3:50 (e.g. Inverse S&P 500), at 3:45 (Inverse High Yield Strategy), as well as more typical 4PM cutoffs. Phone cutoffs appear to generally be 5 minutes earlier.
Some brokers (like Scottrade - click on the Mutual funds tab) do not impose their short term trading fees on funds designed for rapid trading, viz. Rydex, ProFunds, Direxion. Other brokers do charge.
Then there's the 'X' factor. You may think you understand the multiplier, and the risks involved (see, e.g. the SEC page: Leveraged and Inverse ETFs: Specialized Products with Extra Risks for Buy-and-Hold Investors). But read that page carefully - it says that "most leveraged and invesrse ETFs 'reset' daily, meaning that they are designed to achieve their stated objectives on a daily basis." That's not all funds. Some Direxion funds reset monthly. This moderates the risk somewhat if you hold through the month, but has complex effects if you trade intra-month, so much so that that Direxion page links to a slide show presentation on the subject. (Also a 12 page pdf, and other info.)
I'm not even touching on quality of tracking, costs, etc.
For someone in/near retirement age, I'd rather suggest including a Managed Futures fund or something like Merger (MERFX) or dialing down risk. If still inverse funds, I'd suggest lightly including the Rydex/Profunds funds and attempting to work with them to find a satisfactory balance.
A short background note.
We started with Fidelity and IRA's more than 30 years ago. At the time there were not many opportunies for a "regular" mutual fund investor to wander among "sector" funds; with the exception of Fido and their select funds. While 2/3 of our monies were in more traditional funds; as Contra, Growth Co, Mid-cap, Cap & Inc and related, we did wander among the select/sector Fido offerings. In the early years of select funds, one could trade them on an hourly basis......i.e.; 11am, noon, 1pm, 2pm, etc.
So, we have an early history of "trading" funds; and we did well with this and have been in and out of various select funds over the years; although the hourly trading
was curtailed by Fido.
The majority of our retirement accts are not currently with Fido, but the monies in the Fido accts are brokerage types and so we have full access to just about anything we choose.
While we retain a fairly conservative/moderate fund mix; we have discussed a portion of monies in the past and now, too; that may be directed in a fashion as you noted in your post using the Rydex funds. The only index fund at Fido that we have used in their long term bond fund in 2010 (shoul'da been there again this past spring, too).
As to hedging, or what I call; insurance. I am aware to a point, of those who use options to take positions against other holdings for "protection". Using options is a much different aspect of "protection" vs an inverse index of eft; at least in terms of monetary exposure that may be subject to loss.
As to who or when is someone ready for inverse index or etf funds; well, we have kept most of our "funds" faces stuck straight against the winds of many who have been yelling about the low yields on bonds/bond funds and being a "not so good investment". Yes, some day this will shift; but not yet. As to this note; we have had to keep a keen eye to what we sense about market directions and sectors involved. We will continue to learn each and every day; and there will be miscues and good fortune in some areas. The best I/we can ever promise to ourselves at this house is that we know more today than we did the day before.
For your Rydex choices; do you find the indexes to be more suitable than a similar eft serving the same purpose; as to cost or other? What leads you to use the index funds vs etf's?
I thank you for your input previous and guidelines/suggestions you may choose to provide.
Take care,
Catch
Thank you very much for your insights into the "variations" that exist. I had peeked at Fidelity prior to my post and noted cutoff times for Rydex.
All of this is what will have to be part of a learning curve; and especially with the large number of vendors now in this area with an every expanding list of choices.
One may wonder how long before a 5X index/eft is in place.
I will go to the links you provided and dig into the information.
Take care of you and yours,
Catch
Thank you for your time with this. I will not disagree with watching and fiddling having the aspect of the little characters upon one's opposing shoulders each with their own plan.
Yes, the main questions are directed towards inverse index or eft funds.
But, we do watch; and although we do not perform many sells/buys during a year, we do rebalance the portfolio as needed.
We remain slightly haunted by the near past events. Past the fact that the official measurements for what is or is not a recession, and such pronouncments are made; the events that began in the summer of 2007 and what is in place today, at least by what this house thinks we see; finds a "recession" has not yet run its course. The unwind has no comparison or pure meter against which to be judged. This is not my grandfather's, my father's or my (64 years) recession. New pages are being written.
Although we do have some equity exposure and equity-like exposure with HY bonds, we have maintained the majority of our monies flying into the face of "poo-poo" bonds. Well, all bonds are not the same and we have attempted to place many holdings out of harms way, in light of the global conditions. Heck, we may actually be slightly positive by years end.
The question as to the inverse indexes or etf's has been on our minds for some time at this house. Thus, the consideration of using a small portion of monies that would sit as an insurance policy, a hedge; but a hedge that could be removed, at will.
We continue to attempt to find a tone for the markets based upon simple charts and the reality of "reality bites"; as to the other problems, that are structual.
Enough for this late night.
Thank you again, and other thoughts are most welcome for this topic.
Catch
Thank you for your thoughts with your experiences with the 2X/3X bull/bear funds.
Not directed at you or anyone; but I suppose they are those who would think I/we at this house may be attempting to play a fools game with a portion of monies directed at inverse funds in particular.
I do believe we are already in that game; or this house would have handed the money to an outside advisor and still wondered in the evenings if they were doing the right things. HA !
We are already managing mostly actively managed funds, so we have already staked our place on the playing field.
Of course, an inverse fund could not be a buy and hold; but could be a type of insurance policy. Not unlike the fact that some day interest rates will move higher and some of our bond funds would be impacted more than others. We either have the option to sell down some of the bonds, hold tight and cross the fingers to hope the fund managers gets things right, or buy a portion of an inverse bond fund. Even my pea like brain was in opposition to Bill Gross and the Total Return fund moving away from Treasury issues. Yes, this amounts to a he guessed wrong for a period of time and we guessed right. The issue I have with this and managed funds, and in particular the actions of PTTRX this year, is that the fund moves seemed to be flying in the face of their "new normal".
So, the nagging question is whether to forget our house's views of the market place and blind trust the managers, and/or forget even trying to manage our choices of managed funds.
Today, our house would sleep better knowing we have made our own choices, flawed or not, use mostly managed funds; but be prepared to put in place "offsets". This is where the inverse funds thouhgts evolve.
Gett'in late here....this is all for tonight.
Thank you again, and further comments are most welcome.
Regards,
Catch
Thanks for your background note. As to why I am using index mutual funds versus ETFs, it is partly from familiarity with prior use when I had a 401k. Also, some investment advisors that I tried prior to going it alone use them: Palisades Research, Scotia Partners, and EOD Traders.
If you want to study Technical Analysis, I recommend StockCharts.com for their ChartSchool. The site also had user-defined charts, and I like the dk Report for its commentary and charts. You can find the latter in the Public Chart Lists, usually as the first one after the "Hall of Fame" authors.
In your study of Technical Analysis, I would recommend concentrating initially on moving averages and MACD. I started charting on BigCharts.com and later switched to StockCharts.com.
Best regards,
Tony
Thank you for your info. Reads like you had a most progressive 401k available; unlike the majority of plans that are much too limited in choices and function.
Stockcharts is the site I use to look at various movements; and while there are many other charting sites, I do prefer to use this site. I will agree that the School portion is most helpful and that I will be a continuing student for the remainder of my lifetime. I will note, that about two years ago; at StockCharts, I placed 5, X's for a ticker symbol to discover what the site would do with a bogus ticker. Although I am sure a link exists for this function, I found the site took me to a master list of just about the full universe of every ticker and/or sector one could desire......in order to help me define what I was really looking for......whew, a lifetime of work list; but a most interesting list.
I will check the dk report you mentioned, too.
Take care of you and yours,
Catch
DO NOT purchase either long or inverse leveraged ETFs (2x – 3x) unless you plan to
hold them for ONLY a day or two.
My experience (about 12 years) with leveraged ETFs (2x, 3x) has been limited to very
short term trades (a day or two), since they are most efficient on a daily basis.
That is, they are not good as longer term vehicles as their tracking can often vary
substantially from the underlying index.
Actually, you don’t need “inverse” ETFs. As far as I know all “long” ETFs can be sold short.
So, when the market turns down and it’s time to exit my equity ETF, I’ll sell, then sell short
the same instrument. I like to keep it simple.
Along the same lines, I only follow and invest in a few ETFs – SPY, VTI, VEU, and BND.
If I wanted to own an inverse ETF (and I have in the past), I would choose only those
that track the major indices – Dow, S&P 500, Nasdaq and maybe the Russell 2000.
If you wish to use an inverse ETF only as a hedge against an equity mutual fund, you have
several options.
You could buy an inverse ETF with new money. Again, do not buy a 2x or 3x with the intent
of holding more than one or two days.
You could sell a portion of your long position and then sell short the underlying instrument
(or benchmark index) with the proceeds from that sale.
If you already own a long ETF (such as SPY, DIA, VTI, VEU, etc.), you could hedge by selling short with new money, or as above, sell a portion and then sell short with the proceeds.
Using the above technique, if you were to sell 50% of your long ETF and then sell short
the same amount of that same ETF, you’d have a “boxed” position – essentially a 50-50 split
between long and short giving you a neutral overall position.
It used to be that SATB provided clear tax advantages (you weren't closing out your long position and recognizing a gain), but the ability to do that was significantly eviscerated several years ago. (Link is to a brief summary of KPMG's report: Modern Taxation of Short Against the Box.)
Other than many of us (myself included) having had it pounded into us that SATB is a good technique for reducing risk, I'm at a loss to understand its benefits above cash. (That's not to say there are no tax benefits - read the KPMG piece - but rather that these are sufficiently complex that they don't support SATB as a first line strategy.)
SATB was just an example of a neutral hedged position.
And if a person can't figure out how to do a box in another way (Plan B),
then they haven't thought it through.
As an example of a benefit beyond going to cash -
I had very large boxed positions in the late 90s with tech stocks when I was
day trading.
Playing the box, I would take a long position before the close, sell in the middle
of the day and go short, ride it back down, cover the short and again go long into the close.
It was not unusual to capture 30-50 points in a single day on a single stock.
When they clamped down on this, it was simply a matter of going to plan B.
Flack
I personally DON'T touch these rascals, they are designed for the PROs who can sit in computer and trade all day. If you do plan to trade, please only use 0.05% of your play money...just my two cents
Here is the timeline as I understand it: If I've misunderstood or misrepresented your example, please clarify.
before the close (yesterday's?, today's?) - buy 100 shares (long)
11AM (mid day) - sell 200 shares (liquidate position, go 100 shares short)
3:55PM (into the close) - buy 200 shares (cover short, go 100 shares long)
Shorting against the box, in contrast, would be:
before the close - buy 100 shares (long)
11 AM - sell 100 borrowed shares - hold simultaneous long and short positions
3:55 PM - buy 100 shares to cover (using proceeds from 11AM, pocketing difference)
In the former case, which is what I think you're describing, your mid day position is not neutral, it is short, and rather than reducing risk, is increasing risk (a short position being inherently more risky than a long position). In the latter case, at mid day you have shorted against the box, thus hedging the long position you had (and reducing risk).
The latter case is equivalent to:
10AM - buy 100 shares (long)
11AM - sell 100 shares (not borrowed; go to cash)
3:55PM - buy 100 shares (not to cover)
The transactions are identical, only the source of the shares sold is different. Since the transactions are identical, the gain/loss on the transactions are the same (ignoring varying costs of execution).
I'm also curious about your statement that you've had about a dozen years experience with leveraged (2x, 3x) ETFs. Perhaps you mean leveraged mutual funds, because leveraged ETFs did not come into existence until 2006. (Source: Investopedia, and here, confirmed by MarketWatch)
Finally, in light of the fact that some leveraged ETFs reset monthly (see my previous post), I'm befuddled by your statement that (all) leveraged ETFs don't work well beyond a day or two. What's the problem with holding a monthly reset (as a hedge) for a month? Are they not designed to minimize tracking error over a month at a time?
Lot's of stuff in your posts I'm still not clear on.
You write about "insurance". Insurance is basically protection against a (bad) thing happening - if that thing happens, you don't lose, or at least you don't lose as much. If you own a home, you probably insure against fire (generally considered a "bad thing"
That's different from shifting your position to eliminate (or reduce) the risk. In the case of the home, you could sell the home (shift your position) to eliminate the risk of loss. Going from a long position to a neutral one. That's fine, that's a strategy, but it's not insurance. Changing positions is changing your bets, not insuring against your bet being wrong.
Put options provide precisely insurance against loss while maintaining. They guarantee that if you lose value because the price of your asset goes down (e.g. because of a fire, or because of a drop in the market), you can get a pre-determined value for that diminished asset. They don't interfere with your upside potential, just like fire insurance. So while you may not be comfortable with options, they offer the behavior that you seem to be asking for in words.
The Options Industry Council has a great booklet on options strategies - very straightforward, explaining how a particular option or strategy behaves, and why you'd use it. There's an online version. Here's their description of a protective put. While they don't use the word insurance, that's essentially what you're getting. And as they note, it's good if you want a long position (anticipating rising prices), but want to limit (insure against) downside losses.
There are other option strategies that do involve shifting positions. That seems to be what you're suggesting with the use of inverse funds - shifting positions without selling. As I explained in my posts to Flack, if you're shifting to a 100% pure neutral position (by shorting against the box), you've likely got a constructive sale, and you might as well have sold your position. (In any case, if you're shifting to neutral, you're making a particular bet, not insuring against being wrong.) I'm much less certain about the tax implications of, say, holding a 1X S&P 500 fund and then buying a -1X S&P 500 fund.
An example of an option strategy that does something similar to holding 1x and -1x funds (without having to worry about resets) is a collar. (This might be what Flack means by "box"; hard to tell.) It leaves you a little "wiggle room" on prices, but once the stock moves outside of the specified range, you no longer have a position. Hence the neutrality. I believe (it's been a long time since I looked at collars) that because of that wiggle room, you don't have a constructive sale, so you can somewhat defer tax consequences. Though it may depend on how much "wiggle" you have. (In my case, I was looking at using a collar for restricted stock, where I couldn't sell now but wanted to lock in the gain, and wasn't so concerned about the tax implications.)
So think carefully about what it is you want to accomplish, preferably before looking too much into mechanisms (which at this point may be more of a distraction for you). Or "thumb" through the options booklet - not for how these strategies are implemented, but just for what they do. Figure out what you are really looking for, and then people here may be able to suggest various ways to implement that, whether by funds, ETFs (long or short), or options.
First, I very much appreciate your efforts; as well as the input from everyone, to help define this topic for me and whomever else is taking a read.
Perhaps my wording of "insurance" was not properly used; although you note that an option may be defined in a similar fashion.
I will relate the below to the U.S. market place; but the thoughts may apply to any global sector, in which one may be invested.
---Portfolio shifts: In the most simple form, when one has a need to adjust their portfolio, for whatever their own reasons; portions of the portfolio are reduced or sold in full; with this money needing to find a new home.
An example could be that one is satisfied with a mix of 30% VTI and 70% BND for their near or retirement holdings. But, the market mood is changing (recent actions) and "I" decide that a reduction or total sale of VTI is prudent. I can move the money to BND, cash only MM or perhaps (based upon what I think I see) move half of VTI to BND and the other half to something like SDS or an inverse index fund. The thought being to keep most of the money relatively safe from big price swings with BND while drawing a yield; and also take advantage of the equity market moving down and gaining a positive return from SDS or an inverse fund directed towards a sector of the U.S. equity area. The portfolio now has two positive holdings
Another example could be one choosing to maintain current equity or equity like (HY bonds) holdings, but also buy SDS or similar with cash on the sidelines as a potential "offset" for losses in the equity holdings and potential gains with SDS.
I will note that I understand that this is a form of market timing to some degree and that a reversal of market directions to the positive direction would result in SDS or an inverse index fund now moving to the negative side of things.
The original thread was started to help discover what some may be doing with these type of investment vehicles, inverse tools, when the equity market is moving down.
Tony recently noted this in his post: "Tony November 22, In my IRA, I recently sold some RYMXX and bought some RYCWX, RYWYX, RYVNX, RYIRX, and RYTPX. I did this based on charts of technical indicators, overlays, and market indicators."
Tony's move was with MM monies and he did not indicate that he was also still maintaining any equity positions.
Lastly, with respect to market/sector timing. Our house is not buy and hold; and this places us into being market timers in a most moderate sense. Anyone, in my opinion who periodically shifts money for their own good reasons, is in effect; a market timer. We may move monies among funds no more that 5 times in a year; but we attempt to do this for reasons of trends we think we understand and/or to adjust risk/reward in one direction or another.
Hopefully, this write offers some clarification.
Regards,
Catch
http://seekingalpha.com/article/104703-explaining-inverse-and-leveraged-etfs
Thank you for your time and effort with this; and the link.
Regards,
Catch
For example, with a 2x multiplier, a daily reset, and a return of r1, r2, etc. for the index over sequential days, the fund's return is (1+2r1)(1+2r2)(1+2r3) ....
So of course if the index goes up then down 10%, you have 120% * 80% = 96% (article item 5), and the greater the magnitude of the periodic returns r1, r2, ... (i.e. the greater the volatility) the greater this distortion effect (item 4). So "tracking error" increases (across multiple periods) as the multiplier compounds gains and losses (item 3). Saying that you don't get back to even when the index does (item 1) is just a special case of this tracking error.
SeekingAlpha has a better (and older) article that builds on that simple explanation. And it discusses the impact of leveraging costs more extensively, providing real world examples.
For a more complete discussion of why leveraging costs and multiplier effects can even completely wipe out higher multipliers, see Potomac (now Direxion) Fund's explanation of why they chose a modest 1.25 multiplier.
http://web.archive.org/web/20030522204204/http://www.potomacfunds.com/data/125approach.pdf
Those funds no longer exist, however. When the company could not compete against Rydex and ProFunds, it switched Direxion, and tried to out-multiply these families. When that didn't garner market share, it made another pass at offering the marketplace another differentiated product - monthly resets. Some of these ideas are good, but I have trouble with a company that doesn't have the courage of its convictions. The good news is that since these funds (even monthly resets) are pretty short term holdings, you don't have to worry too much about whether the funds will be around in 2013.