Tag Archives: etfs

How To Profit From A Market Correction With Inverse ETFs

Stocks have been slammed lately and 10% losses have been routinely seen across the board. And while trading has smoothed out a little bit in recent sessions, the prospect of a continued downturn cannot be ruled out at this time. Fortunately with ETFs, investors can bet on a downturn in key market segments by using inverse ETFs. These funds give the opposite of what their underlying benchmarks do on a daily basis and thus have been big winners in the recent turmoil. Consider how the following ETFs have done in this difficult time (one week trading from 8/19-8/25): Short China: The Direxion Daily CSI 300 China A Share Bear 1X Shares (NYSEARCA: CHAD ) is up 21% for A-Shares market, the ProShares Short FTSE China 50 ETF (NYSEARCA: YXI ) with an 11.5% gain. Short Nasdaq: the ProShares Short QQQ ETF (NYSEARCA: PSQ ) up 12.65%. Short Oil & Gas: the P roShares Short Oil & Gas ETF (NYSEARCA: DDG ) up 12.5%. Beyond these funds, it is also important to consider volatility (via the iPath S&P 500 VIX Short-Term Futures ETN (VXX ) in this period. This ETN has been a star performer including an over 60% gain in the rough five day stretch in question. However, the longer term performance here has been atrocious so definitely don’t hold it as a long term investment. If you are looking for longer term picks, make sure to zero in on the lower volatility space or ETFs that incorporate volatility into their asset profile. Great examples here include the iShares MSCI USA Minimum Volatility ETF ( USMV) (which has a low volatility focus) and the PowerShares S&P 500 Downside Hedged Portfolio ETF (NYSEARCA: PHDG ) which incorporates volatility as part of its asset mix. Either of these look to be far better for longer time periods than the inverse funds listed above. That is because inverse, and leveraged inverse, ETFs suffer from a daily compounding feature which makes their longer term performance deviate from what you might expect. While this can actually help you in trending markets, it can shred returns in volatile and oscillating markets which we may soon find ourselves in shortly. But for more on the underappreciated inverse ETF space and which funds have made a killing in the correction, make sure to watch our short video on the topic below: Share this article with a colleague

Fund Watch: New Long/Short Fund, Liquidation Of Risk Parity Fund

In this abbreviated edition of Fund Watch, we look at one new fund in registration: the Brown Advisory Equity Long Short Fund; and a fund in liquidation: the Parametric Balanced Risk Fund. New Long/Short Fund in Registration Brown Advisory Funds filed paperwork with the SEC on August 14 announcing its plan to launch the Brown Advisory Equity Long Short Fund. The fund, which is expected to debut 75 days after the filing date (roughly October 28), will be managed by the Brown Advisory equity research team, led by the firm’s head of investments Paul J. Chew. The Brown Advisory Equity Long Short Fund’s objective will be to provide long-term capital appreciation. Its investment strategy involves buying stocks the advisory team deems undervalued, and short-selling stocks the team thinks are overvalued. Under normal circumstances, the fund’s net-long exposure is expected to range from 30% to 80%. Its “flexible equity” strategy will invest across market capitalizations, sectors, and geographic markets. Shares of the new fund will be available in investor-, institutional-, and advisor-class shares, with respective net-expense ratios of 2.09%, 2.24%, and 2.49%. The minimum initial investment will be $5,000 for investor-class shares, $1 million for institutional shares, and $2,000 for advisor-class shares. Liquidation of Balanced Risk (“Risk Parity”) Fund According to paperwork filed with the SEC on August 11, the Board of Trustees of the Eaton Vance Growth Trust voted to liquidate the Parametric Balanced Risk Fund (MUTF: EAPBX ) at an August 10 meeting. The fund will cease taking investments from new shareholders on August 21 and is expected to be fully liquidated by August 28. The Parametric Balanced Risk Fund, which debuted less than two years ago, generated one-year returns of -8.74% through July 31, ranking in the bottom 3% of funds in its Morningstar category. From its September 25, 2013 inception through the August 11, 2015 board meeting that sealed its fate, the fund lost about 4% of its value, with a $10,000 investment at its inception falling to a value of $9,601.23, according to Morningstar.

The Difference Between ‘Investors’ And ‘Traders’

I received a lot of complimentary comments on my last post ( Relax, have a glass of wine ) in which I urged investors to take a deep breath and focus on the market fundamentals which indicated that the macro backdrop was tilted bullishly. However, there was a small minority whose comments ran to the tone of the post being ridiculous advice. The latter group undoubtedly were highly short-term focused and belonged to the community of traders. I would like to take this post to distinguish between my two personas, namely my inner trader and inner investor. During the current period of market turmoil, my inner trader has to deal with many challenges, not the least of which are the wild daily and overnight swings in asset prices. By contrast, my inner investor (and underline the term “investor”) takes a much more longer term view. The typical “investor” and can only check the market briefly during the day and only trades occasionally. They certainly do not have the time, resources or inclination to be fret over and trade swings in overnight stock index futures. While the recent stock market downdraft has been surprising, the average diversified investor hasn’t really been hurt very much. That’s because the bond market has acted as a very good diversifier, unlike 2008 when market contagion leaked into the credit markets. To illustrate my point, imagine someone with a portfolio with a passive 60% stocks and 40% bond allocation. He invests the stock portion into SPY and the bond portion into AGG . The simulation assumes that all income is re-invested back into the ETF of the respective asset classes (SPY dividends to SPY and AGG income into AGG). Once a year on December 31, he re-balances the portfolio back to the target 60-40 weight. Here is a chart showing how far his equity weight is off his 60% target since September 2003, when the data series for AGG began. As of Tuesday, August 25, 2015, the worst day of the stock market drawdown so far, the portfolio was underweight its stock benchmark by only 2.2%, which means that the bond market rallied enough to make up most of the losses suffered by equities. Contrast that with past experiences in 2008 when the equity weight cratered, or even the correction of 2011 when bond diversification had a less adequate effect. (click to enlarge) In 2015, diversification worked! Investors who have diversified portfolios shouldn’t really be freaking out. So relax, have a glass of wine *. * Investors who made the decision to be 100% equities either made the conscious investment policy decision to assume equity volatility in return for a higher rate of return, or the current episode taught them a valuable lesson on the importance of an investment policy. Disclaimer: The opinions and any recommendations expressed in this blog are solely those of the author. None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.