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Bumps In The Road

There are frost-heaves ahead. Is your portfolio ready? Click to enlarge Photo: Kevin Connors . Source: Morguefile At this time of year in New Hampshire, we have to deal with frost heaves. Rain and melt-water from winter storms seep into the roadbed, then lift the road when the water re-freezes. How we deal with the bumps says a lot about what kind of people we are. Some folks sail blithely through, figuring that their car’s shocks can handle the stress. That’s fine as long as they have a good suspension – and strong stomachs! Some of the bigger bumps can really rattle you. Others slow down, picking their way through, creeping over the biggest heaves. That’s fine as long as you don’t need more momentum later, like when you’re going uphill on a snowy day. Still others start to cruise moderately through, but they seem to find perfect speed to maximize effect of the bumps. Their vehicles shake more and more violently, until it looks like their cars are skipping and hopping. From behind, you can see them bouncing inside the car. My engineer daughter tells me that they’ve found a resonance frequency that does the maximum damage. It’s like this in investing. If you see a rough patch ahead, you can just cruise through, riding down and riding back up, if you have the stomach for it – and no loose fillings! Or you can raise cash, lowering your expected return in the short run in exchange for the peace of mind that comes from having dry powder. That’s the go-slow approach. But you really don’t want to be shaken around and panic, selling as the market tanks and buying back in after things get more expensive. That’s a sure way to bottom out – or get launched right off the road! Click to enlarge S&P 500 over the last 20 years. Source: Bloomberg Frost heaves present us with bumps in the road – like the squiggles and jiggles of the market. It’s good to know how to deal with them. Because after they subside, it will be time for mud season.

Dumb Alpha: Accelerating Momentum

By Joachim Klement, CFA I used to consider momentum investing an insult to my intelligence. After all, why should prices go up just because they have gone up in the past? Maybe this is what happens to you if you are bullied once too often in high school, but I have always taken the most pride in my non-consensus views. Momentum investing is the exact opposite. You invest in the popular stocks of the day hoping that the views of the general investing herd are right. More appealing to me are value and contrarian investing because they seem so much more “intelligent.” And in both of these investing traditions, success originates from betting against “the wisdom of the crowds.” Seemingly Stupid, But It Works There is plenty of evidence that momentum investing works in the medium term. While winning investments of the last three to five years tend to underperform as mean reversion kicks in and winning investments of the last month tend to underperform as well, winning investments of the last three to 12 months tend to outperform in the subsequent months. As Cliff Asness and his associates at AQR summarize , this momentum effect has persisted for more than 200 years, exists across many different asset classes, and can be profitably exploited by almost every investor. Today, dozens of systematic anomalies in asset returns are known, but many of them seem to be artifacts of data mining, as Campbell R. Harvey of Duke University and his colleagues have shown . Two of the few anomalies that survive their scrutiny: value and momentum. Dealing with Momentum Crashes The problem with momentum investing is that a market full of momentum investors will likely end up in a bubble as prices deviate more and more from fundamentals. In these circumstances, momentum investing will become very risky and investors might suffer severe losses from sudden changes in momentum that lead to so-called “momentum crashes.” Predicting bubbles and crashes is extremely difficult, but at the forefront of the current research is Didier Sornette at ETH Zurich. His research into log-periodicity and hyperbolic growth may be quite complex, but recently he and his associates published a paper that shows how one can improve the results of traditional momentum investing by looking at momentum acceleration. They calculate a simple measure of past change in momentum – for example, the return over the last six months minus the return over the preceding six months – and show that this simple difference of momentums can predict future performance. Stocks with the highest acceleration (i.e., those that have increasing momentum) tend to have higher returns in the future than stocks with lower acceleration. The returns generated with a simple acceleration strategy tend to be higher than those generated by momentum strategies. Creating Smarter Momentum Strategies To me, this is like smart momentum investing because, effectively, this approach tries to identify trends right when they take off, before more and more investors jump on the bandwagon. As more investors follow a specific trend, the trend accelerates until the influx of fresh investors abates and the trend decelerates again. Acceleration may thus allow momentum investors to invest in a trend early and get out before it is too late. The research on the acceleration factor is still in its infancy and my optimism may well be premature. After all, I am a person who frequently gets on a scale hoping that my weight has dropped only to find that the momentum has in fact accelerated in the opposite direction. But recent research from Morningstar indicates that the acceleration factor may not only be used to improve the returns of traditional momentum strategies, but may predict future episodes of negative skewness (i.e., market declines or even crashes). What seems clear at this point is that acceleration is clearly a dumb alpha generator that is so simple it is hard to believe investors hadn’t discovered it earlier. Disclaimer: Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

16 Highly Traded Leveraged/Inverse ETFs Of 2016

Thanks to heightened volatility in the stock markets, leveraged or inverse ETFs have been gaining immense popularity as investors are making a dash for big gains on quick market turns. This is especially true as the stocks logged their best gains last week on a year-to-date basis after seeing the worst-ever start to a year. However, the markets fell again in yesterday’s trading session, keeping the volatility levels high. Leveraged or inverse products either create a leveraged long/short position, an inverse long/short position or a leveraged inverse long/short position in the underlying index through the use of swaps, options, future contracts and other financial instruments. Due to their compounding effect, investors can enjoy higher returns in a very short period of time, provided the trend remains a friend. However, these funds run the risk of huge losses compared to traditional funds in fluctuating or erratic markets. Further, their performance could vary significantly from the actual performance of their underlying index over a longer period when compared to a shorter period (such as weeks or months). In spite of this drawback, investors flocked to these products for outsized gains in a short span. We have highlighted 16 leveraged/inverse ETFs that have seen massive trading so far this year. Most of these ETFs have delivered negative returns from a year-to-date look, yet have been investors’ darlings with abnormal returns piled up in a short period when the trend favored a specific corner of the world. ProShares Ultra VIX Short-Term Futures ETF (NYSEARCA: UVXY ) Leveraged Factor: 2x Inverse: No Benchmark Index: S&P 500 VIX Short-Term Futures Index YTD Volume: $48.38 billion This product provides two times (2x) exposure to the daily performance of the S&P 500 VIX Short-Term Futures Index, which reflects an implied volatility of the S&P 500 Index at various points along the volatility forward curve. It offers a daily rolling long position in the first- and second-month VIX futures contracts. The ETF has amassed about $378.4 million in its asset base while charging 95 bps in fees per year from investors. It is the most heavily traded ETF so far this year, with the highest trading volume of $48.38 billion. The fund has gained 3 1.3% in the year-to-date time frame. VelocityShares Daily Inverse VIX Short-Term ETN (NASDAQ: XIV ) Leveraged Factor: 1x Inverse: Yes Benchmark Index: S&P 500 VIX Short-Term Futures Index YTD Volume: $25.76 billion With an AUM of more than $ 1 billion, this ETN is popular and offers inverse (opposite) exposure to the S&P 500 VIX Short-Term Futures Index, charging a higher expense ratio of 1.35%. The note has seen total trading volume of $25.76 billion so far this year and has lost 23.7%. Direxion Daily Small Cap Bull 3x Shares ETF (NYSEARCA: TNA ) Leveraged Factor: 3x Inverse: No Benchmark Index: Russell 2000 Index YTD Volume: $14.54 billion This product provides triple (3x) leveraged play to the small-cap Russell 2000 Index, charging 95 bps in fees and expenses. It has been able to manage $787.7 million in its asset base with year-to-date trading volume of $ 14.54 billion. TNA is down 28.9% so far this year. ProShares UltraShort S&P 500 ETF (NYSEARCA: SDS ) Leveraged Factor: 2x Inverse: Yes Benchmark Index: S&P 500 index YTD Volume: $14.33 billion This fund seeks two times leveraged inverse exposure to the S&P 500 index, charging 89 bps in fees. It is relatively popular, having amassed $ 1.5 billion in AUM and having exchanged a total of $ 14.33 billion in volume so far. SDS is up 7.6% in the year-to-date time frame. VelocityShares Daily 2x VIX Short-Term ETN (NASDAQ: TVIX ) Leveraged Factor: 2x Inverse: No Benchmark Index: S&P 500 VIX Short-Term Futures Index YTD Volume: $13.86 billion Like UVXY, this note also offers two times exposure to the S&P 500 VIX Short-Term Futures Index, but comes with an additional expense ratio of 0.70%. With an AUM of $342.8 million, the fund has traded in massive volumes of $ 13.86 billion and has surged 30.7% this year. VelocityShares 3x Inverse Crude Oil ETN (NYSEARCA: DWTI ) Leveraged Factor: 3x Inverse: Yes Benchmark Index: S&P GSCI Crude Oil Index Excess Return YTD Volume: $13.59 billion This product provides three times inverse exposure to the daily performance of the S&P GSCI Crude Oil Index Excess Return. With an AUM of $490.2 million, it has traded in massive volumes of $ 13.59 billion and has gained 18.4% this year. The ETN is a bit pricey as it charges 1.35% in annual fees. ProShares Ultra S&P 500 ETF (NYSEARCA: SSO ) Leveraged Factor: 2x Inverse: No Benchmark Index: S&P 500 Index YTD Volume: $13.30 billion This is the most popular and liquid ETF in the leveraged space with an AUM of $ 1.6 billion. The fund seeks to deliver twice the return of the S&P 500 Index, charging investors 0.89% in expense ratio. It has seen solid trading volumes of $ 13.30 billion so far this year and is down 9.6%. ProShares Short VIX Short-Term Futures ETF (NYSEARCA: SVXY ) Leveraged Factor: 1x Inverse: Yes Benchmark Index: S&P 500 VIX Short-Term Futures Index YTD Volume: $12.64 billion Like TVIX, this fund offers inverse exposure to the S&P 500 VIX Short-Term Futures Index, but with no leveraged factor. It charges 95 bps in annual fees per year from investors and has exchanged about $ 12.64 billion in shares this year. The fund has accumulated $487 million in its asset base and shed 23.7% so far this year. Direxion Daily Gold Miners Index Bull 3x Shares ETF (NYSEARCA: NUGT ) Leveraged Factor: 3x Inverse: No Benchmark Index: NYSE Arca GoldMiners Index YTD Volume: $11.04 billion This product seeks to deliver thrice the daily performance of the NYSE Arca Gold Miners Index, which consists of firms that operate globally in both developed and emerging markets, and are involved primarily in the exploration and production of gold. It is rich in AUM of $946 million and has seen solid trading volume of $ 1 1.04 billion so far in the year. Expense ratio comes in at 0.95%. The fund has delivered robust returns of 1 12. 1% year to date. ProShares UltraPro Short S&P 500 ETF (NYSEARCA: SPXU ) Leveraged Factor: 3x Inverse: Yes Benchmark Index: S&P 500 Index YTD Volume: $10.88 billion This fund provides three times inverse exposure to the S&P 500 Index. It has an expense ratio of 0.93% and has seen a massive trading volume of $ 10.88 billion so far this year. It has amassed $548.6 million in its asset base and gained 10.4% year to date. ProShares UltraPro Short QQQ ETF (NASDAQ: SQQQ ) Leveraged Factor: 3x Inverse: Yes Benchmark Index: NASDAQ 100 Index YTD Volume: $9.91 billion Investors embracing this product made huge profits from the declining NASDAQ 100 Index in a very short period. The product has exchanged $9.9 1 billion in average daily volume this year. It offers three times inverse exposure to the NASDAQ 100 Index, charging 0.95% in annual fees. The fund has an AUM of $378.2 million and has added 19.9% in the year-to-date time frame. ProShares UltraPro S&P 500 ETF (NYSEARCA: UPRO ) Leveraged Factor: 3x Inverse: No Benchmark Index: S&P 500 Index YTD Volume: $9.55 billion This product also tracks the S&P 500 index, but offers thrice the returns of the daily performance with a bit higher expense ratio (by 2 bps) than SPXU. It has an AUM of $856.9 million and year-to-date trading volume of $9.55 billion. UPRO is down over 14.9% so far this year. Direxion Daily Small Cap Bear 3x Shares ETF (NYSEARCA: TZA ) Leveraged Factor: 3x Inverse: Yes Benchmark Index: Russell 2000 Index YTD Volume: $9.41 billion This product provides triple leveraged inverse play to the small-cap Russell 2000 Index, charging 95 bps in fees and expenses. It has been able to manage $444.2 million in its asset base with year-to-date trading volume of $9.4 1 billion. TZA is down 3 1.6% so far this year. VelocityShares 3x Long Crude Oil ETN (NYSEARCA: UWTI ) Leveraged Factor: 3x Inverse: No Benchmark Index: S&P GSCI Crude Oil Index Excess Return YTD Volume: $8.69 billion This is the popular leveraged fund targeting the energy segment of the commodity market through WTI crude oil futures contracts. It seeks to deliver thrice the returns of the S&P GSCI Crude Oil Index Excess Return and has amassed $9 10 million in its asset base. Though the fund charges a higher fee of 1.35% per year, its total trading volume of $8.69 billion year to date is incredible. UWTI is down about 6 1.8% in the same time frame. ProShares Short S&P 500 ETF (NYSEARCA: SH ) Leveraged Factor: 1x Inverse: Yes Benchmark Index: S&P 500 Index YTD Volume: $8.20 billion This is the most popular inverse ETF with an AUM of $2.6 billion, providing inverse exposure to the daily performance of the S&P 500 index. It has seen a massive trading volume of $8.20 billion so far this year and has returned about 5.4%. Expense ratio came in at 0.90%. Direxion Daily S&P 500 Bull 3x Shares ETF (NYSEARCA: SPXL ) Leveraged Factor: 3x Inverse: No Benchmark Index: S&P 500 Index YTD Volume: $8.12 billion SPXL makes an excellent pick for investors seeking to make large profits from the soaring stock market in a very short span. The fund creates a triple leveraged long position in the S&P 500 Index while charging 95 bps in fees a year. It has $635.2 million in AUM and has traded in a solid total volume of $8. 12 billion so far this year. The ETF has lost about 18% year to date. Original post