Tag Archives: events

Simulated Backtests May Not Be Realistic For Volatility ETNs

The volatility ETNs VelocityShares Daily Inverse VIX Short-Term ETN (NASDAQ: XIV ) and iPath S&P 500 VIX ST Futures ETN (NYSEARCA: VXX ) have attracted much interest. Since these products provide the greatest value when used in conjunction with trading strategies that seek to avoid large drawdowns, numerous strategies have been developed. However, both ETNs were brought into existence after the most recent major crisis in 2009. That means they’ve only been through part of the full volatility cycle that runs through boom, bust, and recovery. It’s therefore desirable to backtest these trading strategies against longer time periods to include a diversity of conditions. Two data sources are available for simulating ETN performance beyond their lifetimes: 1) the index these ETNs track , which goes back to 1/31/2006, and 2) the VIX futures on which this index is based and for which there is data going back to their introduction in 2004. It’s become common practice for anyone presenting a trading strategy based on these ETNs to demonstrate and compare their strategy against other strategies using one or both of these data sources. The indexes are generally considered a safe substitute for these ETNs when backtesting and comparing trading strategies because 1) the ETN managers have an obligation to track these indexes and have set up safeguards to correct tracking errors, and 2) various people have found that the ETNs track their indexes fairly well (within a few percent) year over year. Figures 1 and 2 show the ETNs over their full lifetime with their indexes. VXX looks pretty good. XIV obviously has some drift. Figure 1. VXX tracking its index. Figure 2. XIV tracking its index. Despite its longterm drift, XIV tracks reasonably well on a yearly basis, generally slipping 0.5 to 3%, although sometimes slipping 4-6%. Monthly, XIV does better yet, slipping less than 4%. Weekly slippage for XIV is also below 4%. VXX, as you might guess, does better on a yearly and monthly basis. However, on a week-to-week basis, VXX actually sometimes sees wider swings than XIV, slipping as much as 5-6%. However, where things get really interesting is with the daily slippages for XIV and VXX. Figures 3 and 4 show what these look like. Click to enlarge Figure 3. VXX daily slippage by percent index change. Click to enlarge Figure 4. XIV daily slippage by percent index change. As you can see in Figures 3 and 4, there’s a distinctive non-linearity when the index change is large in magnitude. Above 7.5% and below -7.5%, the ETNs tend to compress their index. The other thing that happens is the range of slippage becomes generally wider at these extremes. The range of slippage is quite wide in several other bins as well. This wide range of scatter has the potential to be a significant problem when backtesting with simulated data. Imagine if 10% increases were handed out from time to time to some strategies and not to others. That would clearly skew the results! However, we also see that the distributions are fairly well balanced. While there’s a lot of scatter, it’s spread around in both negative and positive directions. So is this a problem or not? We can’t answer that from just these charts. It looks like there’s a possibility of problems, but there’s also a re-assuring symmetry in these tracking errors that might cancel out. The only way to find out is to test. I did that by running backtests of several common trading strategies on both the ETNs and their index within the time since the ETNs began. Let me note up front that there are some peculiarities to backtesting with the index. It has no open and close prices, just a daily number from settle to settle. To match that as closely as possible using the ETNs, I buy and sell only the close. I also use that day’s trading signal as the decision rule for opening and closing positions that same day. This roughly simulates buying and selling at the close based on a signal that fires just before the close. In this way, I use end-of-day data for both the ETN and the index, which should help make the tests more comparable. The trading strategies I backtested are Vratio Vratio10 CB_10_9_-8_-7 CB_5_2_-8_-7 CB_5_2_-5_-4 Vratio and Vratio10 are from Tony Cooper’s Easy Volatility Investing . The CB strategies are contango-backwardation with four thresholds: XIV-Buy, XIV-Sell, VXX-Buy, and VXX-sell. I picked these strategies because I think they are widely used. The first CB strategy is what got me started investigating slippage. A commenter asked about using a high threshold for contango as a conservative buy indicator. He proposed 10%, but didn’t supply any further thresholds, so I picked three more in the same conservative spirit and ran a backtest. It gave a decent return. I thought it would be a good idea to backtest over a longer timeframe, so I set up to test with the index, checked my setup by backtesting with the index over the same timeframe as the ETN…and well, you’ll see what happened! The third CB strategy uses thresholds that I already knew would probably do fairly well, and the one between is a hybrid. All backtests ran from 03-Jan-2011 to 12-Feb-2016. Let’s get straight to the results: Strategy ETN Gain Index Gain Net Slippage Backtesting with ETN v with Index Vratio 259.1% 238.6% 6.1% Vratio10 312.3% 299.3% 3.3% CB_10_9_-8_-7 170.1% 64.2% 64% CB_5_2_-8_-7 227.8% 84.2% 78% CB_5_2_-5_-4 328.8% 162.0% 64% With the two Vratio tests, we see a small amount of slippage, consistent with the expectation that positive and negative slippages would likely cancel out. But the three contango-backwardation backtests had extremely large net slippages. So much so that while its index performance puts CB_5_2_-5_-4 in the middle of the pack for net gains, tracking errors moved it to first place in the ETN results! If these results are correct (and I’d encourage readers to check me on this since it’s quite surprising), we must accept that backtesting with index data is not a good proxy for ETN performance — at least for some trading strategies. Is there anything we can do to get around this problem? One possibility is to check each strategy for excessive slippage in the overlapped period when both ETN and index are available. If slippage is mild, that suggests the strategy is evenly distributing the conditions that give positive and negative tracking errors, and may be more reliably backtested over a longer period. With strategies that do show bias, a deeper analysis may make it possible to adjust for that bias. On a related note, if short-lived tracking errors can make this much difference, it would be helpful to occasionally re-evaluate the slippage effects of strategies one uses, to see if they’ve changed. Finally, it’s my opinion that futures data prior to 2006Q3 is not valid for backtesting these ETNs in any case. The reason is that M1 and M2 are not consistently present in the futures prior to that time. Since, even with M1 and M2 data, it’s questionable whether we can do a meaningful backtest, the substantial additional uncertainty of missing futures data is surely over-reach. Notes Definition of “slippage” as used in this article: I define a change in the ETN as the product of the change in the index and the change due to slippage: (1+P) = (1+I)*(1+s) Where P is the gain/loss rate of the ETN over some time T, I is the gain/loss rate of the Index over time T, and s is the slippage factor over time T. Rearranging this definition, slippage is calculated as s = ((1+P)/(1+I))-1. Does the ProShares Short VIX Short-Term Futures ETF ( SVXY) have less slippage than XIV? While I did not backtest with SVXY, I did plot its daily slippages, and they’re very similar to XIV. Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in EITHER XIV OR VXX over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Have Copper ETFs Finally Bounced Back?

Copper prices underwent a stressful stretch for quite some time on a soft manufacturing sector in China, global growth worries, a stronger U.S. dollar and surplus supplies. The trouble deepened in 2015 as the greenback continued to gain strength on rising rate speculations in the country (read: Copper ETFs Tumble on China Growth Concerns ). However, the metal bucked the trend at the start of 2016 as the greenback softened slightly on tepid U.S. growth. Also, policy easing in China favored this struggling commodity. Notably, in a move to boost a waning economy, the People’s Bank of China (PBOC) cut reserve requirement ratio (Pending: RRR ) by 50 bps to 17% for all banks effective March 1 (read: ETFs to Gain from China’s Added Stimulus ). Now China matters the most for this metal as the country is the world’s biggest consumer of this industrial metal, accounting for roughly 40% of global copper demand. Also, the red metal has been witnessing shortage of supplies lately. In Chile – one of the key copper producing nations – copper output fell 14% year over year in January, marking the largest decline in a month in about five years. Not only this, production is expected to be on the subdued side even in February, per the sources . The reason for the output decline was worsening ore grade and reduced investment in the mining and power industries, per Reuters . All in all, analysts believe that ‘the commodities rout may be over’. While many are overseeing a likely decline in global output, the demand scenario is apparently firming. As per sources, China’s copper imports in February represented a 49% jump year over year. While this is clearly good news for those who are holding onto copper ETNs such as iPath Bloomberg Copper Subindex Total Return ETN (NYSEARCA: JJC ) — price of which has grown over 11.6% in the last one-month period – copper mining equities and the related ETFs became the biggest beneficiaries. Global X Copper Miners ETF (NYSEARCA: COPX ) – which tracks the Solactive Global Copper Miners Index – advanced over 44% in the above-mentioned period (as of March 10, 2016). Though a subtle turnaround can be noticed in the operating backdrop, copper exchange-traded products have a long way to go for solid improvement. As of now, ‘ Deutsche Bank analysts expect small surpluses this year and in the next, along with a deficit of 280,000 tons in 2018, 350,000 in 2019 and 280,000 in 2020’. So, investors can have a neutral outlook on copper-related exchange-traded products as indicated by a Zacks ETF Rank #3 (Hold) on JJC which has a High risk outlook. Link to the original article on Zacks.com

ETF Stats For February 2016: Count Up, Assets Down

Thirteen new products came to market in February: seven exchange-traded funds (“ETFs”) and six exchange-traded notes (“ETNs”). Closures were on the light side, with just three products being liquidated during the month. The net increase of 10 listings pushes the overall count to 1,863, consisting of 1,659 ETFs and 204 ETNs. Assets declined for the third consecutive month and now total $2.02 trillion. In January, three ETNs encountered early terminations. Some of the February introductions were intended to replace those previously terminated ETNs. Two UBS ETRACS ETNs providing leveraged exposure to master limited partnerships (“MLPs”) fell victim to their own anti-ruination triggers on January 20 due to the steep price plunge among MLPs. These two ETNs were liquidated on February 1, and eight days later, UBS rolled out their replacements: ETRACS 2xMonthly Leveraged Alerian MLP Infrastructure Index Series B ETN (NYSEARCA: MLPQ ) and ETRACS 2xMonthly Leveraged S&P MLP Index Series B ETN (NYSEARCA: MLPZ ). ProShares also brought out a replacement product in February. However, unlike UBS, which rushed to fill the gap created by prior terminations, ProShares brought out its “new and improved” version before its predecessor disappeared. ProShares Managed Futures Strategy (BATS: FUT ), launched 2/18/16, is a more shareholder-friendly version of the existing ProShares Managed Futures Strategy (NYSEARCA: FUTS ). The major difference between the two is that the new FUT will issue 1099s at tax time, while FUTS has been issuing K-1 forms. The underlying structural and regulatory differences prevented ProShares from a merger or simple transformation of the “old” into the “new.” Therefore, ProShares went with a “launch one and close the other” plan and provided shareholders with a one-month overlap. An event occurred in February that you will not see in our statistics. On February 26, 2016, the NASDAQ began listing Eaton Vance Stock NextShares (EVSTC). You may have read some articles declaring these to be the next generation of actively managed ETFs. Technically, they are classified as exchange-traded managed funds (“ETMFs”), and ETMFs are not ETFs . For starters, the U.S. Securities and Exchange Commission has placed some tough restrictions on ETMF advertising. Namely, ETMF sponsors and issuers: Cannot call them an open-end investment company; Cannot call them a mutual fund; Cannot call them ETFs; and Must include a statement that says shares are not individually redeemable (when talking about creation/redemption of shares). There you have it. They are not ETFs and will not be included in our ETF statistics at this time. Additionally, they are not mutual funds or open-end investment companies either. They are ETMFs with their own unique set of order types (buy at a future net asset value [“NAV”] plus premium, sell at a future NAV minus discount) and only one broker (Folio Investing) that can currently process these strange orders. The quantity of ETFs with more than $10 billion in assets grew from 51 to 53 in February, and these vital few hold 59.9% of industry assets. The number of products with at least $1 billion in assets increased from 243 to 246. The median asset level is just $61.5 million, which is a far cry from the “average” level of $1.09 billion. Trading activity slid 13.9% lower for the month to $1.87 trillion, reflecting a 92% turnover ($ volume/industry assets) for the month. February 2016 Month End ETFs ETNs Total Currently Listed U.S. 1,659 204 1,863 Listed as of 12/31/2015 1,644 201 1,845 New Introductions for Month 7 6 13 Delistings/Closures for Month 1 2 3 Net Change for Month +6 +4 +10 New Introductions 6 Months 113 13 126 New Introductions YTD 20 6 26 Delistings/Closures YTD 5 3 8 Net Change YTD +15 +3 +19 Assets Under Mgmt ($ billion) $2,001 $19.4 $2,021 % Change in Assets for Month -0.1% -4.1% -0.1% % Change in Assets YTD -4.6% -9.7% -4.6% Qty AUM > $10 Billion 53 0 53 Qty AUM > $1 Billion 242 4 246 Qty AUM > $100 Million 759 33 792 % with AUM > $100 Million 45.8% 16.2% 42.5% Monthly $ Volume ($ billion) $1,789 $78.9 $1,868 % Change in Monthly $ Volume -13.8% -19.9% -13.9% Avg Daily $ Volume > $1 Billion 14 1 15 Avg Daily $ Volume > $100 Million 108 6 114 Avg Daily $ Volume > $10 Million 335 12 347 Actively Managed ETF Count (w/ change) 137 +3 mth 0 ytd Actively Managed AUM ($ billion) $24.3 +1.6% mth +5.9% ytd Data sources: Daily prices and volume of individual ETPs from Norgate Premium Data. Fund counts and all other information compiled by Invest With An Edge. New products launched in February (sorted by launch date): CS X-Links WTI Crude Oil Index ETN (NYSEARCA: OIIL ) , launched 2/9/16, is an ETN issued by Credit Suisse AG that provides exposure to the Bloomberg WTI Crude Oil SubIndex Total Return. The Index is intended to reflect the returns that are potentially available through an unleveraged investment in rolling West Texas Intermediate crude oil futures contracts, plus the Treasury Bill rate of interest that could be earned on funds committed to the trading of the underlying contracts. It has an expense ratio of 0.55% ( OIIL overview ). ETRACS 2xMonthly Leveraged Alerian MLP Infrastructure Series B ETN (MLPQ) , launched 2/9/16, is an ETN issued by UBS AG linked to the monthly compounded 2X leveraged performance of Alerian MLP Infrastructure Index, less investor fees of 0.85%. MLPQ pays a variable quarterly coupon linked to the cash distributions, if any, on the Index constituents. This ETN essentially replaces the ETRACS 2xMonthly Leveraged Alerian MLP Infrastructure ETN (NYSEARCA: MLPL ), which encountered an early termination trigger in January ( MLPQ overview ). ETRACS 2xMonthly Leveraged S&P MLP Series B ETN (MLPZ) , launched 2/9/16, is an ETN issued by UBS AG linked to the monthly compounded 2X leveraged performance of S&P MLP Index, less investor fees of 0.95%. MLPV pays a variable quarterly coupon linked to the cash distributions, if any, on the Index constituents. This ETN essentially replaces the ETRACS 2xMonthly Leveraged S&P MLP ETN (NYSEARCA: MLPV ), which encountered an early redemption trigger in January ( MLPZ overview ). Guggenheim Total Return Bond ETF (NYSEARCA: GTO ) , launched 2/10/16, is an actively managed ETF offering the opportunity to capitalize on changing relative values in fixed-income securities and sectors. GTO will normally invest in a portfolio of fixed-income instruments of varying maturities and of any credit quality. It uses a strategy that invests primarily in investment-grade fixed-income securities across multiple sectors in any country. It seeks maximum total return comprised of income and capital appreciation, and it has an expense ratio of 0.50% ( GTO overview ). UBS AG FI Enhanced Europe 50 ETN (NYSEARCA: FIEE ) , launched 2/16/16, is an ETN issued by UBS AG linked to the STOXX Europe 50 USD (Gross Return) Index. The ETNs are designed to provide a two times leveraged long exposure to the performance of the Index compounded on a quarterly basis, reduced by the accrued fees of 1.95% per annum ( FIEE overview ). ETRACS S&P GSCI Crude Oil Total Return Index ETN (NYSEARCA: OILX ) , launched 2/18/16, is an ETN issued by UBS AG linked to the performance of the S&P GSCI Crude Oil Total Return Index, less investor fees of 0.50% ( OILX overview ). ProShares Managed Futures Strategy (FUT) , launched 2/18/16, delivers a managed-futures exposure inside of an actively managed ETF. It pursues a long/short strategy with a risk-weighting methodology. It allocates holdings across a broad range of commodity, currency, and financial assets, equally weighting each component based on estimated risk. It uses the S&P Strategic Futures Index as a “performance” benchmark. The new fund will issue 1099s for tax reporting and will essentially be an “improved structure” replacement for FUTS, the ProShares managed-futures ETF that issues K-1 forms and will be closed in March . FUT has an expense ratio of 0.75% ( FUT overview ). UBS AG FI Enhanced Global Yield ETN (NYSEARCA: FIHD ) , launched 2/22/16, is an ETN issued by UBS AG linked to the return on the MSCI World High Dividend Yield USD Gross Total Return Index. The Index reflects both the price performance and the reinvestment of dividends, and therefore FIHD will not pay dividends. The ETN is designed to provide a two times leveraged long exposure to the performance of the Index compounded on a quarterly basis, reduced by its expense ratio of 1.65% ( FIHD SEC filing ). Cambria Sovereign High Yield Bond ETF (Pending: SOVB ) , launched 2/23/16, is an actively managed ETF seeking income and capital appreciation from investments that provide exposure to sovereign and quasi-sovereign bonds. The fund’s holdings consist of liquid sovereign debt issues with high-yield characteristics. It seeks high income generation and capital appreciation and provides exposure to a basket of foreign currencies. Rather than adhering to traditional notions of emerging and developed markets, the strategy seeks the most attractively priced debt securities from a global opportunity set with an expense ratio of 0.59% ( SOVB overview ). Note: The website mentions the Cambria Sovereign Bond Index, but since the EFT is actively managed, it is not clear what purpose the Index serves. Pacer Global High Dividend ETF (BATS: PGHD ) , launched 2/23/16, seeks to track the total return performance of the Pacer Global Cash Cows Dividends 100 Index. The strategy attempts to provide a continuous stream of income and capital appreciation over time by screening for companies with a high free-cash-flow yield and a high dividend yield. Starting with the FTSE All World Developed Large-Cap Index of approximately 1,000 companies in developed markets worldwide, the strategy selects the 300 companies with the highest trailing 12-month free-cash-flow yield. From those, the strategy selects the 100 companies with the highest trailing 12-month dividend yield. PGHD has an estimated initial yield of 4.4% and an expense ratio of 0.60% ( PGHD overview ). WisdomTree CBOE S&P 500 PutWrite Strategy Fund (NYSEARCA: PUTW ) , launched 2/24/16, seeks to track the performance, before fees and expenses, of the CBOE S&P 500 PutWrite Index, a collateralized put write strategy on the S&P 500 Index. The strategy is designed to receive a premium from the option buyer by selling (writing) a sequence of one-month, at-the-money, S&P 500 Index put options. However, if the value of the S&P 500 Index falls below the strike price, the option finishes in-the-money and PUTW must pay the option buyer the difference between the strike price and the value of the S&P 500 Index. This strategy attempts to partially offset a decline in the value of the S&P 500 Index to the extent of the premiums received. In theory, it could help lower portfolio beta and reduce downside risk. PUTW has an expense ratio capped at 0.38% ( PUTW overview ). Janus Small Cap Growth Alpha ETF (NASDAQ: JSML ) , launched 2/25/16, seeks investment results that correspond to the performance of the Janus Small Cap Growth Alpha Index. The underlying strategy seeks risk-adjusted outperformance relative to the U.S. small-cap growth asset class by investing in resilient Smart Growth companies that have proven operational excellence and represent the top 10% of the eligible universe. The Index follows a disciplined process that evaluates key fundamental factors such as growth, profitability, and capital efficiency that are believed to more accurately identify companies poised for long-run sustainable growth. The new ETF has an expense ratio of 0.50% ( JSML overview ). Janus Small/Mid Cap Growth Alpha ETF (NASDAQ: JSMD ) , launched 2/25/16, seeks investment results that correspond to the performance of the Janus Small/Mid Cap Growth Alpha Index. It is a small- and mid-cap growth ETF that systematically identifies Smart Growth companies using a process based on Janus’ fundamental research. The strategy seeks to provide risk-adjusted outperformance by identifying top-tier U.S. small- and mid-cap companies with some of the strongest fundamentals and the capability of delivering sustainable growth in a variety of market environments. It has an expense ratio of 0.50% ( JSMD overview ). Product closures in February and last day of listing : ETRACS 2xMonthly Leveraged Alerian MLP Infrastructure ETN ( MLPL ) 1/29/16* ETRACS 2xMonthly Leveraged S&P MLP ETN ( MLPV ) 1/29/16* Janus Equal Risk Weighted Large Cap (NASDAQ: ERW ) 2/24/16 *Note: The last day of listing for MLPL and MLPV was 1/29/16 (the last business day of January), and they were available to trade throughout January. Therefore, the closures are classified as occurring in February. Product changes in February: Van Eck Global acquired the Yorkville MLP ETFs. The Yorkville High Income Infrastructure MLP (NYSEARCA: YMLI ) became the Market Vectors High Income Infrastructure MLP ETF ( YMLI ), and the Yorkville High Income MLP (NYSEARCA: YMLP ) became the Market Vectors High Income MLP ( YMLP ) effective February 22. Announced product changes for coming months: EGShares Emerging Markets Domestic Demand (NYSEARCA: EMDD ) will become EGShares EM Strategic Opportunities (EMSO) and reduce its expense ratio to 0.65% effective March 1. Despite the name and ticker change, the underlying index still claims to be “a 50-stock free-float market capitalization-weighted index designed to measure the performance of companies in emerging markets that are tied to domestic demand.” Global X FTSE Greece 20 ETF (NYSEARCA: GREK ) will change its underlying index and its name to Global X MSCI Greece ( GREK ) effective March 1. The iShares iBonds target maturity ETFs will be renamed to include “Term” in their names, and the “AMT-Free” funds will be renamed “Muni Bond” ETFs effective March 1. ETFS Physical White Metal Basket Shares (NYSEARCA: WITE ) will close and liquidate, with its last day of trading occurring March 2. Invesco PowerShares will change the names and underlying indexes on four ETFs , with two receiving new ticker symbols, effective March 18. PowerShares S&P Emerging Markets High Beta (NYSEARCA: EEHB ) will become PowerShares S&P Emerging Market Momentum (EEMO), PowerShares S&P International Developed High Beta (NYSEARCA: IDHB ) will become PowerShares S&P International Developed Momentum (IDMO), PowerShares S&P International Developed High Quality (NYSEARCA: IDHQ ) will become PowerShares S&P International Developed Quality ( IDHQ ), and PowerShares S&P 500 High Quality (NYSEARCA: SPHQ ) will become PowerShares S&P 500 Quality ( SPHQ ). Invesco PowerShares will close four ETFs , with March 18 being their last day of listed trading. The affected funds are PowerShares China A-Share (NYSEARCA: CHNA ), PowerShares Fundamental Emerging Markets Local Debt (NYSEARCA: PFEM ), PowerShares KBW Capital Markets (NYSEARCA: KBWC ), and PowerShares KBW Insurance (NYSEARCA: KBWI ). ProShares Managed Futures Strategy ( FUTS ) will have its last day of trading on March 18. Barclays is seeking shareholder approval to add an early termination trigger to the iPath S&P GSCI Crude Oil Total Return ETN (NYSEARCA: OIL ) and reduce the investor fee from 0.75% to 0.70% effective April 29. Previous monthly ETF statistics reports are available here . Disclosure: Author has no positions in any of the securities, companies, or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) is received from, or on behalf of, any of the companies or ETF sponsors mentioned.