Beta Plus and Minus shares (ETF)

[Mencken]

A few weeks back...maybe longer, someone posted a comment on these products (they give you 2 x the daily change in the market - either negative or positive). The OP was suggesting they may be a rip off. I was one that responded on the method they are calculated, and something in the back of my head said that sometime I should look more closely at these...

I have since looked at that in more detail...and I am now inclined to agree that they may be a rip off. I checked the math by using some random simulations (simple Monte Carlo simulation) and in the vast majority of the scenarios the value of the share ends up at 0. That's right...0.

If the volatility is set to something similar to the market under normal times this change to 0 might take a relatively long time, but that is the ultimate direction they go.

So the question is...who is profiting. I have not figured out exactly how...but I suspect that the company selling these products is the likely candidate.

 

[squash500]

You're right . These horizon beta pro etfs are guilty of the constant leverage trap. For more info on this you can go to www.indexroll.com.

They also charge a 1.15 mer and pay no dividend. Their values are calculated daily not annually. You will still make money on these 2x leverage etfs if you guess correctly which way the market is going. Which obviously is no easy feat.

The average holding period of these etfs is 3 weeks. Therefore, not a buy and hold investment---lol.

The only good part of these etfs is that they are the only canadian investment vehicle in Canada that will let you short the market without having a margin account. IMHO, buying or selling put and call options is 100% more complicated than buying these etfs.

 

[Mencken]

You're right . These horizon beta etfs are guilty of the constant leverage trap. For more info on this you can go to www.indexroll.com.

They also charge a 1.15 mer and pay no dividend. There values are calculated daily not annually. You will still make money on these 2x leverage etfs if you guess correctly which way the market is going. Which obviously is no easy feat.

The average holding period of these etfs is 3 weeks. Therefore, not a buy and hold investment---lol.

The only good part of these etfs is that they are the only canadian investment vehicle in Canada that will let you short the market without having a margin account. IMHO, buying or selling put and call options is 100% more complicated than buying these etfs.

I can see someone buying them to give some downside protection for a portfolio of say...dividend paying stocks. That is what I was thinking of doing. But with the constant erosion from both the MER and the basic math I don't think they are at all appropriate for that. Like you say...just very short holding periods...if at all.

By the way...even without the leverage they still go to 0 in my scenarios. Its the function of the basic math.

So I guess it has to be options...although they are not a cheap way to go either. But at least its just out front cost.

 

[squash500]

So I guess it has to be options...although they are not a cheap way to go either. But at least its just out front cost.

I don't mean to be negative but options aren't easy either . You have to pick the right stock or index, the right strike price, and try and get the bid/ask spread as low as you possibly can. You also need to have a margin account.

I've been paper trading options for a month and a half. I haven't made money on one trade yet---lol. If possible, try to trade US options as the spreads on the Montreal Exchange are usually so wide that you could fit a mack truck through them---lol.

If possible it's best to trade US options because of the increased volume and the much tighter spreads. Good luck with everything.

 

[porn_lover]

I have used beta pro products for hedging, you have to trade these.

I am not sure I understand the going to 0 part. Yes it will approch 0 but never reach 0 in the long run. It all depends on the underlying its tracking, if that moves 50% in one day then yes it will goto zero. Beta pro makes their money from the MER, so more volume means more money and on spreads too. I am not saying I know the A to Z of such products, just from what I understand.

Now these is a triple exposure ETFs that just started trading in US, its like shaving blades, hahaha
http://www.indexuniverse.com/sectio...300-leverage-inverse-power-set-to-launch.html

Options are a totally different beast of its own. There a quite a few other variables you need to be aware off. Its true US options spread are much narrower and liquid. The best and safe way to start to learn about options is Covered call, look into it.

 

[club69]

thx to Mencken, squash500, porn_lover, i was also interested to look into the Beta Pro ETFs product. in order to create the bull or bear leverage position, the provider has to use either options or futures as underlying, i just want to know anyone with experience trading these products, are they liquid enough? is the spread tight enough? agree with squash500 that US options are much higher volume/liquidty and lower spread, but then there is currency risk vs CAD.

 

[Mencken]

I have used beta pro products for hedging, you have to trade these.

I am not sure I understand the going to 0 part. Yes it will approch 0 but never reach 0 in the long run. It all depends on the underlying its tracking, if that moves 50% in one day then yes it will goto zero. Beta pro makes their money from the MER, so more volume means more money and on spreads too. I am not saying I know the A to Z of such products, just from what I understand.

Now these is a triple exposure ETFs that just started trading in US, its like shaving blades, hahaha
http://www.indexuniverse.com/sectio...300-leverage-inverse-power-set-to-launch.html

Options are a totally different beast of its own. There a quite a few other variables you need to be aware off. Its true US options spread are much narrower and liquid. The best and safe way to start to learn about options is Covered call, look into it.

It is true that as long as volatility is less than 50% the 2 x product will never go to 0. But it will, in many scenarios, get down to a few cents or fractions of a cent. In my model if I set volatility to be 2% or less (per day) then in 365 days (of trading) much more often than not the holder of the fund ends up with much less than the start amount. Not sure of the % of time as I have not run it enough, but enough that the fund seller can make much more money than their MER, and make it on both sides of the market as they sell both the plus and minus product. It's a gold mine for them.

 

[club69]

the following two links are the Bull/Bear 60 ETFs from HBP vs TSX for the past 2 yrs, they did mirror the move (bull moves with TSX while bear moves opposite to TSX) plus the leverage effect, so it seems that they are relative good for their purpose. agree with the other poster, if TSX goes up 50%, then the Bear60 ETF will go to zero, while if the TSX drops 50%, the Bull60 ETF will go to zero, that's because of the leverage effect, not because the issuer takes all the money.

again my question is, anyone traded these? are they good enough for trading? (ie, high volume, low spread)

http://ca.finance.yahoo.com/q/bc?t=2y&s=^GSPTSE&l=off&z=m&q=l&c=HXU.to

http://ca.finance.yahoo.com/q/bc?t=2y&s=^GSPTSE&l=off&z=m&q=l&c=HXD.to

 

[squash500]

thx to Mencken, squash500, porn_lover, i was also interested to look into the Beta Pro ETFs product. in order to create the bull or bear leverage position, the provider has to use either options or futures as underlying, i just want to know anyone with experience trading these products, are they liquid enough? is the spread tight enough? agree with squash500 that US options are much higher volume/liquidty and lower spread, but then there is currency risk vs CAD.

I've traded the hed and the hxd before. Of course, I bailed out too early .

I sold in May 2008, just as the xeg and the xiu were starting to tank. On some days, I lost 20% on the hed. The volatility on these etfs is crazy. Ironically, If I would have held on another month I would have made an 100% gain on each. I wound up instead taking a small loss on each position.

The products are definitely liquid enough. The hxu usually trades over 2 million shares a day and the hed about 1 million shares per day. the spreads are pretty tight as well at least on these 2 etfs!

 

[big dogie]

Not all of HBP ETF's are liquid or the last time I looked at them they weren't, volume is something you must look at... Also they all don't work the same eg HGD HGU my understanding is they are trading on futures, like right now I am guessing are trading on the Jan or Feb delivery price, not an index or the commodity, you have to have a good understanding before you put your money in harms way.

b d

 

[squash500]

Not all of HBP ETF's are liquid or the last time I looked at them they weren't, volume is something you must look at... Also they all don't work the same eg HGD HGU my understanding is they are trading on futures, like right now I am guessing are trading on the Jan or Feb delivery price, not an index or the commodity, you have to have a good understanding before you put your money in harms way.

I agree with you 100% . Trying to get through that hbp etf prospectus is no easy feat!

 

[club69]

I've traded the hed and the hxd before. Of course, I bailed out too early .

I sold in May 2008, just as the xeg and the xiu were starting to tank. On some days, I lost 20% on the hed. The volatility on these etfs is crazy. Ironically, If I would have held on another month I would have made an 100% gain on each. I wound up instead taking a small loss on each position.

The products are definitely liquid enough. The hxu usually trades over 2 million shares a day and the hed about 1 million shares per day. the spreads are pretty tight as well at least on these 2 etfs!

thx for the details