ETFs in your portfolio?

Transcription

1 ETFs in your portfolio? Find out how ETF options can enhance your portfolio Jason Ayres, DMS Director, R N Croft Financial Group

2 Limitation of liability The opinions expressed in this presentation are those of the author(s) and presenter(s) only and do not necessarily represent the views of of the Bourse de Montréal Inc. (the Bourse ) and/or its affiliates. This document is offered for general information purposes only. The information provided in this document, including financial and economic data, quotes and any analysis or interpretation thereof, is provided solely for information purposes and shall not be construed in any jurisdiction as providing any advice or recommendation with respect to the purchase or sale of any derivative instrument, underlying security or any other financial instrument or as providing legal, accounting, tax, financial or investment advice. The Bourse recommends that you consult your own advisors in accordance with your needs. All references in this document to specifications, rules and obligations concerning a product are subject to the rules, policies and procedures of the Bourse and its clearinghouse, the Canadian Derivatives Clearing Corporation, which prevail over this document. Although care has been taken in the preparation of this document, the Bourse and/or its affiliates do not guarantee the accuracy or completeness of the information contained in this document and reserve the right to amend or review the content of this document any time and without prior notice. Neither the Bourse, nor any of its affiliates, directors, officers, employees or agents shall be liable for any damages, losses or costs incurred as a result of any errors or omissions in this document or of the use of or reliance upon any information appearing in this document.

3 Agenda ETFs and Options on ETFs Enhanced Option Income Options for Protection

4 ETFs and Options on ETFs

5 What is an Exchange Traded Fund? Diversification of a mutual fund with the liquidity of a stock Contains investments to replicate the performance of market sectors, bonds, commodities or specific indices and/or investment styles The ETF tracks the net asset value of the underlying investments

6 The Exchange-Traded Fund Market 129,7 milliards $ CA (Right axis) (Left axis) Source : TSX ETF Report Q *521 ETFs Q2 2017

7 How are they structured? Formed through the deposit of securities in the fund Shares in the fund are often representing a fixed amount of the assets Those shares then trade on the Toronto Stock Exchange the same as shares in a listed company

8 Example Barrick Gold Newmont Mining Franco Nevada Goldcorp Inc Agnico-Eagle Mines Randgold Royal Gold Kinross Gold Anglogold Ashanti Gold Fields Ltd. ishares S&P/TSX Global Gold Index ETF (XGD)

9 ETF Directory Source: tmxmoney.com > Investor Tools > ETF Directory

10 ETFs vs. Mutual Funds Exchange-Traded Fund Traded on an exchange Low fees, no penalties Liquid markets with real-time prices Many are options eligible Mutual Fund Through fund company Possible Fees, penalties Buy/sell at end of day on closing Not options eligible

11 Characteristics of ETFs Liquidity Diversification Transparency Options Eligibility

12 TFSA / RRSP Eligible Strategies Purchase calls instead of buying a stock/etf Purchase puts instead of short selling stocks/etf Purchase calls to secure the future purchase price of a stock/etf Covered call writing Protective Puts

13 Options on ETFs

14 ETF Options Market Source : TSX ETF Report Q2 2017

15 ETF Options Market From the 521 exchange traded products listed on the Toronto Stock Exchange, there are 54 of them with options listed on the Montreal Exchange. Source : TSX ETF Report Q List of options :

16 Covered Call Writing

17 The Methodology How is covered call writing different from just buying stocks?

18 Standard Investing How much money will your stock make? How long it is going to take to make money? If you start losing on the investment, do you sell at a loss or do you wait for it to come back? You hope your investment will make you fortune but you really don't know?

19 Covered Call Portfolio You know how much cash flow you are going to make You know how long it will take you to make your cash flow You are not overly concerned whether the stock goes up or down You are just consistently collecting money

20 Covered Call Writing You buy or own a stock You get paid upfront for selling the right for a speculator to buy the stock from you: at a specific price over a specific period of time

21 Covered Call Example Buy 1,000 shares of XGD (Gold Miners ETF) 1,000 x $12.00 per share = $12, March 2018 $13.00 call: $0.85 Bid (7 months) Sell 10 calls (covered) You collect $ for the obligation to sell the 1,000 shares over in the next 7 months at $ % premium cash flow in 7 months

22 Covered Calls Why is it safer to invest your money using the Covered Call methodology?

23 Risk Distribution Standard Investment Profitable Risk STOCK IS UP A LOT STOCK IS UP A LITTLE STOCK STAY THE SAME Option Writing Profitable Lost Opportunity STOCK IS DOWN A LITTLE STOCK IS DOWN A LOT Lost Opportunity

24 Covered Call Example Buy 1,000 shares of XGD (Gold Miners ETF) 1,000 x $12.00 per share = $12, March 2018 $13.00 call: $0.85 Bid (7 months) Sell 10 calls (covered) You collect $ for the obligation to sell the 1,000 shares over in the next 7 months at $ % premium cash flow in 7 months

25 Covered Call Example Share Price $12.00 Strike $13.00 Premium 7.08% STOCK IS UP A LOT STOCK IS UP A LITTLE STOCK STAY THE SAME STOCK IS DOWN A LITTLE Closing Price in 3 months $18.00 $13.00 $12.00 $11.50 Return 15.41% 15.41% 7.08% 2.91% STOCK IS DOWN A LOT $ %* *Long stock investor is down %

26 Dividends Receive dividends in addition The only risk is assignment on ex-dividend day if there is no premium left in the option

27 Covered Calls Over a ten-year period, if the compound return from stocks is 14% or less, a covered call strategy would not only reduce volatility but increase one s return. Long Term Investment Alternatives for Fiduciaries by Dr. Sheen Kassouf, University of California, Irvine

28 Performance returns of MCWX vs. XIU (Oct to Aug. 2017) MCWX % XIU % Standard deviation 0.77 % 1.15 % Sharpe ratio Better Sharpe ratio: return/risk Excluding transaction costs

29 Incremental Covered Call Writing Establish price targets Generating current income from a long-term holdings Loss repair Hedging individual stocks Tax deferral strategy

30 Options as Protection

31 Portfolio Theory - Diversification Only widely accepted method of managing risk is diversification Therefore everyone needs to develop a broad based portfolio of stocks The consequence is diluted returns Concentration in just one individual stock is frowned upon as you have too much unique risk

32 Standard Investing Dilemma When you start making money, when do you take profits? If you start losing on a stock, when do you sell? Do you wait for the investment to come back?

33 Stop Losses Traditional approach to limiting losses on an investment has always been to put in a stop loss How does a put options differ from a stop loss?

34 Disadvantages of stop-loss orders Stop-loss orders are at risk to market volatility $20.00 Target $17.00 $15.00 Stop Loss

35 Morning Gap Slippage $17.00 Purchase Price $15.00 Stop Loss $14.50 Fill Price

36 Morning Gap Slippage Stop Loss Filled

37 Protective Put vs. Stop Loss Protective put no volatility stop out risk Protective put guaranteed strike price exit

38 Why buy Protective Puts? A way of quantifying risk An alternative to stop-loss orders A method of repositioning yourself on long-term holdings

39 Put Protection Buy 1 put for every 100 shares of stock Put gives you the right, but not the obligation to sell the ETF at the specific price (strike price) over the specific period (expiration)

40 Protective Puts on XIU Buy 1000 shares of XIU at $ $22, Buy 10 December 2017 $22.00 puts at: $0.50/share - $ Insured all risk of loss below $22.00 (4 months) The cost was 2.25% of your investment Investor has 100% of the upside potential with a defined worst case loss

41 Scenario 1 ETF rises Position: 1,000 $ DEC 2017 $22 XIU $0.50 Over the next 4 months the XIU rises to $24.00 The protective put expires for a $ loss The investor continues to own the ETF as an investment If the investor feels they need more protection, they can buy more

42 Scenario 2 The ETF falls Position: 1,000 $ DEC 2017 $22 XIU $0.50 Over the next 4 months the XIU declines to $18.00 The protective put has an intrinsic value of $4.00 ($22.00 strike - $18.00 price) The investor has two choices: 1. Exercise and sell the shares at $ Sell the put for $4.00 and keep owning the shares

43 Protection for Locking In Profits Your stock appreciates like expected You want to hold on, but you don t want to lose your profits Buy a protective put to lock in the sale price, while you continue to profit from the upside

44 Locking In Profits Buy protective put, lock in sale price without cutting off upside $20.00 $17.00 Purchase Price

45 Risks If you continuously buy expensive protective puts you can experience accumulating losses Adding protective puts at strategic times can be interpreted as market timing or trading, which cannot suit everyone

46 Summary Allows investor ability to control absolute worst case risk Ability for investors to lock in gains Ability to reposition on a stock/etf that has moved against you

47 Thank you

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