Tag Archives: stocks

Be Careful Holding ETFs Long Term

Friday happy hour conversation in the Village reminds us why holding levered ETFs more than a day isn’t a good idea. Leveraged ETFs can suffer from disproportionate downside. Risks are added from levered ETFs taking on derivatives and exposure to debt markets.. Always consult your personal financial advisor before holding ETFs over the course of the long term. By Parke Shall Today we wanted to go over a topic that we were asked about on Friday at happy hour. Thom and I were having a conversation with someone who was talking about their portfolio to us. This person commented that they had been holding several leveraged ETFs over the course of months, and he did not understand why the moves that the ETFs were making did not seem congruent with the moves in the individual sectors that they represented. This brings us to a topic that we don’t think enough people know about or understand. Not all ETFs are created equal. Some ETFs are designed specifically to be held over the course of the long term. Good examples of these are ETFs like the iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) or the iShares Nasdaq Biotechnology ETF (NASDAQ: IBB ), two different style unlevered ETFs that we have talked about in our last four or five articles. TLT tracks the yield on treasuries, and IBB is an unlevered ETF that tracks the biotech sector. Each sector has an ETF, or several ETFs, similar to IBB for biotech. We have heard a lot about IBB over the last month because biotech has crashed, so we’re using that as an example. ETFs like IBB are helpful in showing sector moves proportionate to the broader market, like you can see in the below chart. IBB data by YCharts TLT tracks 20 year treasuries and provides a dividend according to their yield. TLT joins a host of other ETFs, like the Vanguards High Dividend Yield ETF (NYSEARCA: VYM ) which are meant to and designed to be hold for the longer-term, and have minimal fees. They take a small management fee, but they can be good to hold for conservative investors over the course of long-term. Any type of ETF for bonds especially makes bond investing a little bit easier, as sometimes buying individual bonds can be too costly for retail investors. So let’s look at what makes leveraged ETFs difficult to hold for more than a day or two, and why they should not be traded over the course of weeks or months. A simple example is this. If you buy a $50 2x levered ETF that goes up 10% you’re going to see a return of 20%, and that ETF will be priced at $60. The next day, the ETF falls back from $60-$50, you would expect the underlying to be the same as it was prior to the first day. The problem is that the drop from 60 to 50 is only about a 17% drop, meaning the underlying would only need to fall about 8 1/2% for you to lose the same amount that you made when the market grew 10% in the day prior. This type of attrition makes these instruments difficult to hold over the course of weeks or months. This is why it is not uncommon to see splits of different natures, including reverse splits, take place in these instruments. Like the gentleman we were speaking to yesterday, one needs to be aware of the mechanics of how leveraged instruments work before making what we believe to be a terrible mistake in buying them and letting them sit in your portfolio unwatched. The same goes for ETNs (exchange traded notes) that have major risk to the debt that’s been issued by a bank (or other institution) that presents counterparty risk. Sometimes with ETFs or ETNs that have these characteristics, you wind up seeing charts like this. UWTI data by YCharts In addition a lot of levered instruments will rebalance or reset on a daily basis, meaning that if the markets are volatile and not moving in one set direction, you could wind up taking losses on a day where the sector or underlying appears neutral. Finally, one needs to realize that these type of instruments may achieve their leverage from utilizing derivatives like options and sometimes debt instruments. These types of risks are not suitable for those looking to buy and hold or those investing for the long term. Before picking up an ETF to hold for the long term, make sure to check with your personal financial advisor.

Market Lab Report – Premarket Pulse 10/5/15

Major averages gapped lower on Friday’s weaker than expected payrolls report, then climbed higher the rest of the day to finish strongly to the upside on increased volume. The majors, however, are still under critical moving averages and, as we have mentioned, investors should expect heightened levels of volatility. Thus Friday’s positive action will not necessarily lead to a resumption of any uptrend as seemingly positive action following the Flash Crash in 2010 and the steep correction in mid-2011 resulted in retests of lows. However, within the context of an overall bearish consolidation following the “Capitulation Monday” lows of late August, a rally up towards the 50-day moving average in any of the indexes would not necessarily be surprising. As always, we let the stocks guide us in terms of how bullish or bearish we become. CME FedWatch puts the odds of a rate hike when the Fed next meets on October 28 at just 7%. December 16 is not much better at 29%. Thus, it is probably safe to say that the Fed will not be hiking rates this year, despite what Chairperson Yellon said earlier. We must remember the Fed is tied to the government so anything they say is designed to soothe markets or talk them higher. Futures are up on improving commodity prices. European markets are higher by more than 2%.

ETF Update: John Hancock, Goldman Sachs, JPMorgan And More Launched Funds This Week

Welcome back to the SA ETF Update. My goal is to keep Seeking Alpha readers up to date on the ETF universe and to gain some visibility, both for the ETF community, and for me as its editor (so users know who to approach with issues, article ideas, to become a contributor, etc.) Every weekend, or every other weekend (depending on the reader response and submission volumes), we will highlight fund launches and closures for the week, as well as any news items that could impact ETF investors. Last week we saw the first Goldman Sachs (NYSE: GS ) ETF enter the arena, the ActiveBeta U.S. Large Cap Equity ETF (NYSEARCA: GSLC ). While there was a followup launch from GS this week, John Hancock made the biggest splash with its first 6 ETF offerings. The newcomer has a strong history in mutual funds and I am excited to see how these new ETFs perform in the coming months. Fund launches for the week of September 28, 2015 Another Goldman ETF opens for business (9/29): One week after the launch of GSLC, Goldman Sachs rolls out one for emerging markets , the Goldman Sachs ActiveBeta Emerging Markets ETF (NYSEARCA: GEM ). John Hancock adds 6 new funds (9/29): As stated by Andrew G. Arnott, president and CEO of John Hancock Investments, “it was important to us to develop an ETF product that seeks to address investor needs for performance potential, backed by an investment approach rooted in decades of academic research.” They are the John Hancock Multifactor Mid Cap ETF (NYSEARCA: JHMM ), the John Hancock Multifactor Large Cap ETF (NYSEARCA: JHML ), the John Hancock Multifactor Technology ETF (NYSEARCA: JHMT ), the John Hancock Multifactor Healthcare ETF (NYSEARCA: JHMH ) and John Hancock Multifactor Financials ETF (NYSEARCA: JHMF ). John Hancock doesn’t seem to have pages for the 6 funds yet, but the SEC filing linked above should be a good starting point for interested investors. JPMorgan (NYSE: JPM ) launches a new U.S. Equity ETF (9/30): The JPMorgan Diversified Return U.S. Equity ETF (NYSEARCA: JPUS ) tracks the Russell 1000 Diversified Factor Index , which “seeks to provide U.S. exposure with the potential for better risk-adjusted returns.” Credit Suisse rolls out an income ETF (9/30): The Credit Suisse X-Links Multi-Asset High Income ETN (NYSEARCA: MLTI ) tracks an index “comprised of a broad, diversified basket of up to 120 publicly-traded securities that historically have paid high dividends or distributions.” IndexIQ launches a new fund-of-funds ETF (9/30): The IQ Leaders GTAA Tracker ETF (NYSEARCA: QGTA ) follows the IQ Leaders GTAA Index, which “seeks to track the performance and risk characteristics of the 10 leading global allocation mutual funds. Identifying 10 leading mutual funds is based on fund performance and asset size and is reconstituted annually.” iShares launches a hedged alternative to Japanese equities (10/1): The iShares Currency Hedged JPX-Nikkei 400 ETF (NYSEMKT: HJPX ) “seeks to track the investment results of a broad-based benchmark composed of Japanese equities.” It is a hedged alternative for the iShares JPX-Nikkei 400 ETF (JPXN). There were no fund closures for the week of September 28, 2015 One of the first comments on my article last week raised an important question : The ETF world is ever changing. Smart beta was a new thing recently. Similarly I saw few articles that talked about ETMF (Exchange Traded Mutual Funds) being the next big thing. Would love to see some research on it.. Our own Jonathon Liss came up with an answer that I feel many readers will find incredibly helpful as ETMFs start to gain traction in the market: ETMFs are not really ETFs. In fact, I think the term is intentionally confusing in an attempt to ride the popularity of ETFs. In most key ways, these products are no different than mutual funds. The fact they are ‘exchange-listed’ is meaningless for all intents and purposes. They only price once a day and are non-transparent meaning they only have to list their holdings once per quarter akin to MFs – and on a 1-2 month delay at that as is standard with 13F filings. Additionally, they have a strange auction bidding system required to buy them. They do likely share some of the theoretical tax advantages of ETFs but that’s about it. Thus, I think they should essentially be lumped with mutual funds and not ETFs. If I’m missing key details I’d be happy for others to fill me in but this is what I’ve been able to gather from the literature I’ve seen. Have any other questions on ETFs or ETNs? Please comment below and I will try to clear things up. As an author and editor I have found that constructive feedback is the best way to grow. What you would like to see discussed in the future? How can I improve this series to meet reader needs? Please share your thoughts on this first edition of the ETF Update series in the comments section below. Have a view on something that’s coming up or a new fund? Submit an article. Share this article with a colleague