Tag Archives: etfs

Finding The Right Volatility ETF

Summary Volatility products can provide market leading returns. Proper education and knowledge of the VIX futures market is needed to be highly successful. Risk factors should be accounted for when creating and implementing your strategy. Welcome to the Seeking Alpha ETF Guide. This article will focus on how a VIX ETF could play an active role in your portfolio. When looking for a VIX ETF you have several different options between short-term and mid-term futures products. This article will cover only the most active funds. For more options visit the Seeking Alpha ETF Hub for a list of all volatility funds. Both types of products (short and mid-term) focus on the VIX Futures which trade independent of the market and the popular and well publicized VIX Index. Short-Term There are two types of short-term volatility products. To determine which type of product is for you, you first need to determine whether you are betting on an increase or decrease in volatility. Long volatility products, such as iPath S&P 500 VIX ST Futures ETN (NYSEARCA: VXX ) and ProShares Ultra VIX Short-Term Futures (NYSEARCA: UVXY ) which offers two times the leverage, benefit from increasing volatility. During periods of low or decreasing volatility, inverse products such as VelocityShares Daily Inverse VIX ST ETN (NASDAQ: XIV ) and ProShares Short VIX Short-Term Futures (NYSEARCA: SVXY ), produce better results. All short-term VIX products focus on the front and second month’s contract in the VIX Futures. Mid-Term You also have long and inverse options available in mid-term futures products. For rising mid-term futures you have VelocityShares Daily Inverse VIX MT ETN (NASDAQ: ZIV ) and for decreasing mid-term futures there is VelocityShares Daily Inverse VIX MT ETN . All mid-term VIX products focus on the seventh through fourth month’s contracts in the VIX futures. Mid-term futures products are not as popular as the short-term products. Education Investors looking to use VIX products in their portfolios should have a very high level of education into the inner workings of the VIX Futures market. Seeking Alpha is a great resource for many articles that focus on the how and why rather than the right now. I have written many articles that are specifically geared towards investor education and are meant to serve as training tools for years to come. Since the vast majority of these products have been around less than a decade, back testing is often used to demonstrate the effectiveness of different strategies. Investors should also note there are distinct differences between short-term and mid-term volatility products. A personal pet peeve for me is when I see comments such as “this thing is rigged.” That is a good example of someone who hasn’t educated themselves on volatility and is now mad about their poor decision. Many misconceptions exist in regards to VIX Futures products. A thorough understanding of how these products are structured can prevent expensive mistakes. Trades based on hopes and dreams or borrowed money are a recipe for disaster. A proper education is the only way to prevent failure when trading volatility. Contango/Backwardation A key indicator when determining longer-term directions of volatility products are contango and backwardation. Contango will benefit inverse volatility products, like XIV, while backwardation will benefit long volatility products, such as VXX. For more information on this key metric I recommend this short video . Trading Objectives Long volatility products – Many investors use long volatility products as insurance for their primary portfolio. It is difficult to time spikes in the VIX and these products lose value over time. They are not meant to be buy and hold investments. From historical data, the longest these products have gone without losing value is less than one year. Inverse volatility products – During flat and rising markets, these products can often beat the major benchmark indices. Although I don’t advocate a long-term buy and hold strategy with any volatility products, short-term inverse funds have provided the best returns when held for periods of 2-6 months. Risks This would be the most important section of this article. I have spent countless hours promoting the education and risk factors of investing in various VIX funds. Although these products can provide returns several times greater than the market, they also come with many risks that are hidden to novice investors. I have seen many beginners with high hopes of getting rich quick. They may win the first or second hand but eventually lose all or a very significant amount of their capital by not properly assessing risks before making trades. If you do not fully understand how these products work or do not have a thorough idea of the risks of investing in volatility, my recommendation would be to avoid them while you become more comfortable and complete additional research. Practice accounts and small trades are a great way to build real knowledge on the effectiveness of your strategy. Rising markets make inverse products seem like the perfect investments. However, these products can easily lose 50-80% of their value during periods of economic turmoil. Black swan events are rare but would significantly effect volatility products. Historical examples of these events would include acts of war, terrorism, and other unforeseen events that would have profound impacts on the market. Returns VIX funds have provided some of the best returns over short to medium time frames. Take a look below at some of the best results for inverse and long volatility products: Chart created by Nathan Buehler using backtesting data from The Intelligent Investor Blog . Conclusion The best advice I can give if you are thinking about trading volatility is to learn as much as you can about how these products operate. Test your strategies, document results, confirm successes, and evaluate failures. You should feel very comfortable with using these products before making your first large trade. Seeking Alpha is a great resource to use. By interacting with contributors and other users, you can create your own virtual professional learning community. I hope you have found this introduction to volatility funds useful. Now it is time to start researching and comparing individual funds. Thank you for using the SeekingAlpha ETF Guide!

Worried About Looming Rate Hike? Try This Ex-US REIT ETF

The Federal Reserve Chair, Janet Yellen’s recent indication of a possible rate hike has possibly made investors putting their capital on real estate sector or real estate investment trust (REIT) in the U.S. jittery. This is because a rise in interest rates leads to a high borrowing cost for the REITs on which they are highly dependent. Moreover, high-dividend yielding stocks like REITs usually become less attractive when treasury yields rise amid rising interest rate. It is for this reason investors should definitely take a look at the SPDR MSCI International Real Estate Currency Hedged ETF (NYSEARCA: HREX ) , which focuses on the ex-U.S. REIT stocks. The fund is launched by State Street Global Advisors. HREX in Details HREX tracks the performance of the MSCI World ex USA IMI Core Real Estate Capped 100% Hedged to USD Index, which is a free float-adjusted market capitalization-weighted index, aimed to measure the performance of stocks in the MSCI World ex USA IMI Index. In order to be a part of the index, a company needs to generate at least 75% of its revenues from real estate activities related to core property types, including industrial, office, retail, residential, health care, hotel and resort, data centers, and storage. Since the fund’s investment is denominated in foreign currencies, it is susceptible to fluctuations in exchange rates between such currencies and the U.S. dollar. However, the Index applies a hedging methodology against such fluctuations by employing a one-month forward rate against the total value of the non-U.S. denominated securities in the Index. The fund replicates this hedging technique by entering into foreign currency forward contracts. The ETF comprises 261 stocks with top holdings including Unibail-Rodamco SE ( OTCPK:UNRDY ) (4.77%), Sun Hung Kai Properties Limited ( OTCPK:SUHJY ) (4.64%) and Mitsubishi Estate Company Limited ( OTCPK:MITEY ) (3.01%). The top 10 holdings constitute around 31% of the fund. Considering country-wise allocation, Japan, U.K. and Hong Kong occupy the top three positions with shares of 19.50%, 14.85% and 14.79%, respectively. The fund charges 48 bps in fees from investors per year (see all Real Estate ETFs here). How Does it Fit in a Portfolio? REITs are required to distribute at least 90% of its annual taxable income to shareholders annually in the form of dividends. Since the fund invests in ex-U.S. real estate sector, it definitely shields the investors enjoying the high dividend yield from the dangers of an impending rate hike in the U.S. Further, strengthening of dollar against most of the major currencies is attracting investments in the non-U.S. real estate sector, particularly hotels, office buildings and retail complexes. In addition, along with ongoing urbanization and fast-growing middle class in the emerging economies, easing of restrictions on foreign direct investments is leading to increased flow of international capital into REITs in these economies. In the first half of 2015, foreign investment turnover in Asia-Pacific escalated 9% year-on-year to $13 billion . All this bode well for the fund as investors can tap the booming real estate sector in the non-U.S. countries by investing in it (read: A Comprehensive Guide to REIT ETFs ). ETF Competition HREX definitely earns a point over most of the ex-U.S. real estate ETFs because it is currency hedged. Still, there are a number of such ETFs that worth to mention. A couple of top global real estate ETF includes the SPDR Dow Jones International Real Estate ETF (NYSEARCA: RWX ) and the Vanguard Global ex-U.S. Real Estate ETF (NASDAQ: VNQI ) . RWX tracks the Dow Jones Global ex-U.S. Real Estate Securities Index and focuses on publicly traded real estate securities in developed and emerging countries excluding the U.S. It has an asset base of $4.7 billion and focuses heavily on Japan, U.K. and Australia. On the other hand, VNQI tracks the S&P Global ex-U.S. Property Index and focuses on REITs in emerging markets and developed markets outside the U.S. It has amassed nearly $3 billion in assets and gives high preference to Asia Pacific countries. However, VNQI looks attractive than RWX on both the cost and yield fronts. RWX charges 59 bps in fees and has a dividend yield of 3.24% while VNQI charges 24 bps in fees and has a robust dividend yield of 4.45%. Link to the original article on Zacks.com

Myths Of Discounted Cash Flow

Discounted cash flow (DCF) is the adjustable wrench of modern financial mechanics. Essentially, the analyst forecasts the revenue and costs for several years out and applies an appropriate discount, or interest rate, to calculate what those future dollars are worth today. The process is supposed to provide a hard number for the current worth of the company. But as many of us recognized in college, there is a lot of room for wiggle in the process. Forecasting revenues and costs is tricky and always based on assumptions. An optimistic analyst might generate a rosy forecast while a pessimist may predict gloom and doom. Usually, analysts just assume the future will look like the past, which is always a dangerous assumption. How many oil analysts saw the recent collapse in oil prices as a result of projecting the past into the future? Next, analysts have to choose a discount rate, which means they have to forecast interest rates. That is more difficult than predicting revenues and small errors have enormous leverage to ruin analyses. In my book Financial Bull Riding I quoted former American Finance Association president John Cochrane who said in a speech that investor discount rates can change radically: Discount rates vary a lot more than we thought. Most of the puzzles and anomalies that we face amount to discount-rate variation we do not understand. Our theoretical controversies are about how discount rates are formed.” [1] Also, few analysts pay attention to the business cycle that drives the largest changes in revenues, costs and interest rates, and fewer know anything about the ABCT. Not only do profits rise and fall with the amplitude of the cycle, so does risk tolerance on the part of investors that translates to discount rates. The wizards of finance in academia created DCF in order to make the field more like the hard, math-based science of physics. But all they accomplished was to trowel body putty over the ugly subjectivity and apply a coat of paint. However, one professor has peeled back the cracking paint and putty. Aswath Damodaran is Professor of Finance at the Stern School of Business at New York University who teaches classes in corporate finance and valuation, primarily to MBAs. He recently wrote on his blog that: Most people don’t trust DCF valuations, and with good reason. Analysts find ways to hide their bias in their inputs and use complexity to intimidate those who are not as well versed in the valuation game. This may surprise you, but I understand and share that mistrust, especially since I know how easy it is to manipulate numbers to yield almost any value that you want, and to delude yourself, in the process. It is for this reason that I have argued that the test of a valuation is not in the inputs or in the modeling, but in the story underlying the numbers and how well that story holds up to scrutiny. Damodaran uses Amazon (NASDAQ: AMZN ) as an example. He arrived at a value of $175/share, but he demonstrates that optimists have arrived at $468 while pessimists went as low as $32. The current stock price is the average of all investors’ expectations about the company. The author concludes that “…the conventional view that intrinsic value, if done right, is timeless is nonsense.” Austrian investors have known this all along and have insisted on a radical application of subjectivism to stock analysis. Of course, the goal of DCF is to help the investor find undervalued stocks and earn more in returns than just investing in a stock index such as the S&P 500. Another way to look at the market is to consider that investors undervalue almost all stocks in the depths of a recession. Profits are low, but so is risk tolerance and the discount rate that investors apply to earnings. Then as profits rise and risk tolerance enlarges during the expansion, most stocks become overvalued just before the next crash. Investors are waking up to the fact that stocks have been overvalued for a while and the economic omens point to a looming recession. So the smart move would be to abandon the stock market for the bond market or cash and wait for the crash, after which investors will be pessimistic and profits will be low, so stocks will become undervalued. Most of the stock market is a great value play in the depths of a recession. Investors don’t even have to be choosy. Just throw money at it. All stocks will rise. But if you want a big boost, choose stocks in the NASDAQ. Companies listed on that exchange tend to be capital goods industries, and as we know from the ABCT, those companies take the hardest hits in the economic collapse but rebound the most in the recovery. [1] John H.Cochrane, “Presidential Address: Discount Rates,” The Journal of Finance, Vol. LXVI, No. 4, (2011): 1092.