1 / 13

Leveraged ETFs

Leveraged ETFs. And International ETFs. Background. Bull ETFs: 2x or 3x an index’s return Bear ETFs: 1x, 2x or 3x the inverse of an index’s return Use leverage and derivative contracts to replicate these returns In the U.S.: 13% of the ETF universe by # of funds

carla-oneil
Download Presentation

Leveraged ETFs

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Leveraged ETFs And International ETFs

  2. Background • Bull ETFs: 2x or 3x an index’s return • Bear ETFs: 1x, 2x or 3x the inverse of an index’s return • Use leverage and derivative contracts to replicate these returns • In the U.S.: • 13% of the ETF universe by # of funds • 26% of the ETF trading volume • In Canada: • 26% of the ETF universe • 61% of the ETF trading volume

  3. Background • Confusion in the marketplace • Class action law suits • SEC, FINRA, and IIROC investor alerts • Morgan Stanley, UBS and BoA have banned their financial advisors from recommending them to clients • Example of the confusion • 2008 performance TSX Global gold index: 0.8% HGD (2x bear ETF): -84.5%!

  4. Factors influencing returns: Compounding • Designed to replicate daily returns. • What happens if you hold the fund for two days? Net return of the index is: Net return of the 2x bull ETF is: Net return of the 2x bear ETF is:

  5. Factors influencing returns: Compounding • Same implication for longer holding periods • In general, • Momentum (or trends) works in the investor’s favour • Negatively autocorrelated returns will result in a loss even if index breaks even

  6. Factors influencing returns: Management • Previous example assumed perfect replication. There may be addition deviations due to the different risks involved • Use of leverage • Use of derivatives, e.g., index swaps, futures, forwards • Replication and trading typically outsourced to structured product and derivative specialists

  7. Factors influencing returns: NAV vs. Market prices • Another layer that affect’s investors’ bottom line • ETF could be trading at a premium or discount • Discount: NAV per share > market price • Premium: NAV per share < market price • Additionally, when liquidity is reduced (e.g., during the financial crisis), bid-ask spreads go up

  8. Daily Premium/Discount as a Fraction of NAV

  9. Daily Premium/Discount as a Fraction of NAV

  10. % Bid-Ask SpreadGrey: Jan 1 – Sept 14, 08Black: Sept 15 – Dec 31, 08

  11. International ETFs • Consider ewj • Managed by BlackRockiShares • Index: MSCI Japan (345 stocks) • MER: 0.56% • Because of the time difference, when it is traded in New York, the Japanese market is closed • Question: what do the price movements of ewjreflect?

  12. International ETFs • Potential strategies? • Consider the following: • Short sell ewj, ewh, ewk and fxi at noon on September 15, 2008 • Close out the positions within the first 15 minutes of regular trading on the 16th • Would have earned: 3.49% on ewh, 8.38% on ewy, 7.83% on fxi , and 1.22% on ewj, all in less than 24 hours

  13. Additional Information • The market for ETFs • Ownernship (Institutional/Retail): U.S. (50/50), Europe (90/10)

More Related