ETFs 304: Effectively Using. Alternative, Leveraged & Inverse ETFs. Dave Nadig. Paul Britt, CFA Senior ETF Specialist ETF.com

Transcription

1 ETFs 304: Effectively Using Dave Nadig Chief Investment Officer ETF.com Alternative, Leveraged & Inverse ETFs Paul Britt, CFA Senior ETF Specialist ETF.com

2 ETFs Questions 1. Do geared ETFs have a role in client portfolios? 2. Should anyone own VIX ETFs? 3. Can you buy hedge fund exposure in an ETF?

3 ETFs Answers 1. Geared ETFs can hedge specific risks, but you must rebalance

4 ETFs Answers 1. Geared ETFs can hedge specific risks, but you must rebalance 2. No one should own VIX ETFs

5 ETFs Answers 1. Geared ETFs can hedge specific risks, but you must rebalance 2. No one should own VIX ETFs 3. ETFs don t hold hedge funds, but they can act like one

6 Leveraged & Inverse

7 Leveraged & Inverse - Landscape 266 Funds $40B Total AUM 42 Funds AUM/ADV < 15 Source ETF.com, as of 12/31/2013

8 Leveraged & Inverse - Landscape 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% ETF Assets by Daily Multiple Source ETF.com, as of 2/4/2013

9 Leveraged & Inverse Geared ETFs can: Be used for speculation Make calls with less capital Make nuanced hedges

10 Leveraged & Inverse To get the multiple over time, you must

11 Leveraged & Inverse: Mind the Gap 50% 40% 30% Total Return 20% 10% 0% -10% -20% 07/08/ /08/2014 Daily Financial Bull 3x Shares (FAS) naïve 3x R100 Financials Index

12 Leveraged & Inverse: Daily Reset Level Index 100 ETF 100 ETF's Exposure Before Reset Day 1 ETF's Exposure After Reset Day 2 - Index up 10%, ETF Loses 20 Index ETF 80 Day 3 - Index down 10%, ETF gains 16 Index ETF 96

13 Leveraged & Inverse: Rebalance! Level ETF's Exposure Before Reset Day 1 ETF's Exposure After Reset Day Index return: -1% 2 Day Day -2x 2 - Naïve Index up 10%, Return: ETF Loses 20 2% Day -2x Actual Return: -4% Day 3 - Index down 10%, ETF gains

14 Risks & Daily Resets 60% 40% Total Return 20% 0% -20% -40% -60% 31/12/ /12/2010 FAZ FAS R1000 Financial Index

15 Leveraged & Inverse: 2013 returns Source Bloomberg, as of 12/31/2013

16 Leveraged & Inverse: How to Rebalance! Trade Skillfully Understand the gearing Know the underlying

17 A Note On Volatility High Volatility/Trendless markets: L&I funds underperform Low Vol/Trending markets: L&I funds outperform Sophisticated traders: You can extract vol by shorting the levered fund while going long the underlying.

18 Alternatives

19 Alternative Product Summary Spread Products Take offsetting futures positions with little or no exposure to underlying asset Volatility Products Seek upside from equity volatility using VIX futures Hedged Products Aim for positive, steady, uncorrelated returns

20 Alternative Product Summary Absolute Returns Tactical Tools Global Macro # Spreads # Hedge Fund Replication 2 Inflation 2 Inflation 3 Long/Short Volatility 1 Low Correlation 1 Risk 1 Tactical Asset Allocation 3 Yield Curve 1 Trend-Following 1 Long/Short # Volatility # Long/Short Broad-based 4 S&P 500 Mid-Term 4 Long/Short Commodities 1 S&P 500 Short-Term 3 Long/Short Currency 2 Trend-Following 1 Long/Short Equity 9 Merger Arbitrage 3 *Table excludes Leveraged & Inverse funds Source ETF.com, as of 3/14/2014

21 Spread Products Objectives Aim to Harvest Contango Capture gains from steepness of futures curve Example: OILZ ETRACS Oil Futures Contango ETN - Short front-month futures, long 6 th, 7 th & 8 th month Aim to Capture Market Expectations Yield Curve Inflation

22 VIX ETFs: The Promise The Dow Jones Industrial Average took its steepest dive of the year on Thursday, losing 353 points a day after the Federal Reserve hinted it might end its bond-buying stimulus program later this year The Wall Street Journal, 6/21/2013

23 VIX Correlations Correlation & Beta of VIX and S&P VIX Futures Indexes Relative to S&P 500 1/22/2009 3/31/2014 Name Correlation Beta VIX S&P 500 VIX Short-Term Futures S&P 500 VIX Mid-Term Futures Source Bloomberg, CBOE

24 VIX Correlations Correlation and Beta of VIX and S&P VIX Futures Indexes Relative to VIX, 1/22/2009 3/31/2014 Name Correlation Beta S&P 500 VIX Short-Term Futures S&P 500 VIX Mid-Term Futures Source Bloomberg, CBOE

25 VIX ETFs: the Problem 80% 60% 40% Total Return 20% 0% -20% -40% -60% 07/08/ /08/2014 VIX Index VXX Source Bloomberg, as of 8/7/2014

26 VXX: A Long Run Wealth Destroyer 30% 10% -10% VIX Since Inception Net Inflows: $6.5 Billion AUM: $1.0 Billion Total Return -30% -50% -70% -90% -110% 29/01/ /01/ /01/ /01/ /01/ /01/2014 VIX Index VXX Source: Bloomberg, ETF.com, 1/29/2009 8/7/2014

27 VIX ETFs: Contango $21 VIX Index Futures Curve $20 $19 $18 $17 $16 $15 $14 $13 feb-13 mar-13 abr-13 may-13 jun-13 jul-13 ago-13 sep-13 oct-13 Source Bloomberg, as of 2/6/2013

28 VIX ETFs: Backwardation $45 $43 $41 $39 $37 $35 $33 $31 $29 $27 $25 VIX Index Futures Curve Spot Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Source Bloomberg, as of 8/22/2011

29 VIX ETFs Decay Day 1 Each Total 5 contracts Feb days to expiry $20 $100 Day 30 5 contracts Feb 14 1 day to expiry $16 $80 Roll 4 contracts Mar days to expiry $20 $80

30 The VIX Moment S&P 500 Short-Term Vix Index Mid-Term Vix Index

31 It Works! ( ) S&P /10 Short-Term Vix 90/10 Mid-Term Vix Total Return % % % (Annualized) -9.78% -6.53% -5.65% Standard Deviation 52.00% 37.92% 41.89% (Annualized) 30.02% 21.89% 24.19%

32 Until it doesn t ( ) S&P /10 Short-Term Vix 90/10 Mid-Term Vix Total Return 88.02% 31.06% 55.44% (Annualized) 15.46% 6.35% 10.56% Standard Deviation 34.73% 20.52% 25.94% (Annualized) 16.57% 9.79% 12.38%

33 VIX ETFs VIX Index: Volatile but Mean Reverting VIX Futures ETFs: Spike and Bleed

34 VIX ETFs: How to Trade, Don t Own Short Term vs Mid Term Not 40 Act

35 Hedge Fund ETFs Hedge Fund ETFs Don t Hold Hedge Funds

36 Hedge Fund ETFs Objectives: Positive Returns in All Markets Uncorrelated Returns with Major Asset Classes Means: Hedge Fund Strategies Replication Copy Cat

37 Hedge Fund ETFs Characteristics: Multi-Asset Long/Short Low or No Beta Exposure: ETF of ETFs, Derivatives, Securities High fees Disparate performance

38 Hedge Fund ETFs: 2013 s Best?

39 Hedge Fund ETFs the Rest

40 Hedge Fund ETFs: How to Screen for Size and Liquidity Match Strategy to Goal More Due Diligence Cash Collateral, Tactical or Strategic Derivatives Exposure: Notional vs Market Value Costs Holding, Trading, Due Diligence Time Short Exposure Direct or Derivatives? No Downside Guarantee

41 Notable Events in Alternatives September 2011: E-TRACS Shutters 12 alternative volatility ETNs November 2012: QuantShares Shutters 3 market neutral funds August 2014: IndexIQ QAI assets ~ $800M

42 ETFs Summary 1. Geared ETFs can be useful, but you must rebalance 2. No one should own VIX ETFs 3. ETFs don t hold hedge funds, but they can act like one

43 Thank You

44 ETFs 304: Effectively Using Dave Nadig Chief Investment Officer ETF.com Alternative, Leveraged & Inverse ETFs Paul Britt, CFA Senior ETF Specialist ETF.com