What are you buying today?

[Sunrider]

Sorry - I may be really daft after a long day at work (or generally), but if I understand the product correctly at -1x gearing, it should produce the same percentage return each day as the underlying, correct? If so, this should mean that the cumulative return is the same for this product and for the underlying (well the cumulative negative, to be precise). This is in contrast to what happens to the leveraged ETFs where the daily reset matters in that the cumulative returns will diverge - another way to put it is that it is my assumption (may well be incorrect) that the daily reset for an unlevered fund (inverse or not) is the same as for an underlying (I.e. No reset).

 

Is that not how it works? I understand that the reset matters for leverage >1 (or below -1) but I don't understand how the reset would work for leverage = 1 ... What's the point of a reset in that case?

 

Thank you - C.

 

"Am I missing something here?"

 

Yes, I think so.  A daily resetting short product isn't equivalent to shorting the underlying.  The daily reset makes the positions different.

 

This may not be the best Let's say you are short $1K of VXX and it goes up 10%.  Now you are short $1.1K.  You have greater short exposure (same number of shares, greater dollar number).  If you are long SVXY, the 10% move means you have $900, so lower exposure to the short.  If VXX goes back to even, the VXX short will go back to even.  The SVXY long won't.  Looking at actuals, VXX and SVXY are both down over 30% in the last year.

 

SVXY can be wiped out in a 100% daily move.  VXX short won't be (though would be very painful).  SVXY loss can only be 100%.  VXX short is not so limited.  SVXY can have a lollapalooza effect.  Up close to 400% since inception.

 

In at least some instances, SVXY may be a better position.  Other times worse.  Either way, they are different.

[benhacker]

Sorry - I may be really daft after a long day at work (or generally), but if I understand the product correctly at -1x gearing, it should produce the same percentage return each day as the underlying, correct?

 

Yes.

 

If so, this should mean that the cumulative return is the same for this product and for the underlying (well the cumulative negative, to be precise).

 

No.

 

Exaggerated case.

 

Day 1 (both start at $1):

Underlying up 90%.

-1x ETF down 90%.

 

Day 2:

Underlying (now at $1.9) down 50% to $0.95

-1x ETF (now at $0.10) up 50% to $0.20

 

--

 

This isn't an example intended to show the -1x ETF is worse or bad... just showing path dependence.  Run your own numbers.  Effects are small for low vol, monotonic movements in price (or actually improved)... but for short term whip saw vol, that is high, both inverse and leveraged (inverse / normal) funds decay.

 

Not to mention fees, and exactly how a inverse fund attains it's goal which isn't so simple.

 

Hope i answered the question you were getting at.

 

 

[Sunrider]

Thanks - I think we're all talking slightly different things here and are now on the topic of path dependent returns - and I think the simple (non leveraged) inverse and a short in the underlying (absent fees and the other good things you mentioned) should produce the same cumulative return

 

To use your example, replace the -1x ETF with a short position - you get the same result as in your example, correct? As you put it, there's path dependence and one doesn't end up with same price level for symmetrical moves of a short and a long position, i.e. your returns of 90% and -50%, cumulatively, work out to either -5% or -95% in a long and a short position (your 0.2 should be 0.15). Am I understanding your correctly?

 

So the inverse etf does the same as the short position -- which was sort of my starting point ... again, unless I've completely gotten this wrong?

 

 

 

Sorry - I may be really daft after a long day at work (or generally), but if I understand the product correctly at -1x gearing, it should produce the same percentage return each day as the underlying, correct?

 

Yes.

 

If so, this should mean that the cumulative return is the same for this product and for the underlying (well the cumulative negative, to be precise).

 

No.

 

Exaggerated case.

 

Day 1 (both start at $1):

Underlying up 90%.

-1x ETF down 90%.

 

Day 2:

Underlying (now at $1.9) down 50% to $0.95

-1x ETF (now at $0.10) up 50% to $0.20

 

--

 

This isn't an example intended to show the -1x ETF is worse or bad... just showing path dependence.  Run your own numbers.  Effects are small for low vol, monotonic movements in price (or actually improved)... but for short term whip saw vol, that is high, both inverse and leveraged (inverse / normal) funds decay.

 

Not to mention fees, and exactly how a inverse fund attains it's goal which isn't so simple.

 

Hope i answered the question you were getting at.

[benhacker]

Sunrider,

 

Let's see if we can bridge the communication divide, I think we are close.

 

Thanks - I think we're all talking slightly different things here and are now on the topic of path dependent returns - and I think the simple (non leveraged) inverse and a short in the underlying (absent fees and the other good things you mentioned) should produce the same cumulative return

 

Keep in mind, a "-1x" ETF is something you BUY... you go long it... to say it replicates the performance of a short is to me something you would need to quantify with an example, because as someone who shorts a lot, I don't actually understand how they could be the same.

 

To use your example, replace the -1x ETF with a short position - you get the same result as in your example, correct?

 

I strongly disagree.  One is an ETF you buy, and one is a variable rate of interest loan (with which I can use the proceeds to buy something, or hold in cash)... I do not see the equivalence.  I get that by calling them "short ETFs" or whatever, folks seem to think there is, but they are like cats and dogs to me.

 

Shorting a funding source, not an investment.

 

As you put it, there's path dependence and one doesn't end up with same price level for symmetrical moves of a short and a long position, i.e. your returns of 90% and -50%, cumulatively, work out to either -5% or -95% in a long and a short position (your 0.2 should be 0.15). Am I understanding your correctly?

 

Again, I would ask you to provide an example.  If I short something, I sell it and I get the proceeds.  Then you need to make an assumption about those proceeds (what are they used to purchase, does that ever change, etc).  A naked short exposes one to unlimited loss... a -1x ETF does not... so I don't see how then could they ever be equivalent?

 

So the inverse etf does the same as the short position -- which was sort of my starting point ... again, unless I've completely gotten this wrong?

 

I don't mean to annoying (at all!), but just try to create an example where the payoff from shorting is like that of buying a -1x fund.  They are simply not the same... at all.  They are directionally similar, and that is how the marketing pitches them to investors, but they are not what folks think they are.

 

I think what you will see as you noodle on this (or I may be wrong) is that you can construct a long/short *portfolio* that looks like a -1x ETF... but if you model what that portfolio will have to do on a day to day basis to meet it's investment mandate it turns out that the portfolio needs to be adjusted daily to bring it back to a -100% ratio... but I don't have to adjust a short position by itself... so how are they the same?

 

So if you want to say that a -1x ETF is just a short portfolio with the funds from shorts held in cash and rebalanced daily in the direction of market movements to ensure 100% exposure is maintained... well, then I would probably agree that's what (to a rough approximation) a -1x ETF is.  But that isn't equivalent to a short position at all... and it has some seriously interesting behavior based on the path of the underlying.

 

I think of leveraged and short ETFs as basically a long short algo that is momentum driven... buy on the way up, sell on the way down.

 

That's all they do... with huge friction.

[Sunrider]

Ben - thanks, I think I got you now and see the error in my thinking (your point re buying something clinched it).

 

As I said in PM, I think I've also derailed the conversation slightly and one of the original issues discussed was shorting (or not) vol. My view is that people need to remember that the VXX does not express the VIX, it's just an average between two future prices (before we go onto whether to use an inverse ETF to express a short view).

 

Thanks - C.

 

Sunrider,

 

Let's see if we can bridge the communication divide, I think we are close.

 

Thanks - I think we're all talking slightly different things here and are now on the topic of path dependent returns - and I think the simple (non leveraged) inverse and a short in the underlying (absent fees and the other good things you mentioned) should produce the same cumulative return

 

Keep in mind, a "-1x" ETF is something you BUY... you go long it... to say it replicates the performance of a short is to me something you would need to quantify with an example, because as someone who shorts a lot, I don't actually understand how they could be the same.

 

To use your example, replace the -1x ETF with a short position - you get the same result as in your example, correct?

 

I strongly disagree.  One is an ETF you buy, and one is a variable rate of interest loan (with which I can use the proceeds to buy something, or hold in cash)... I do not see the equivalence.  I get that by calling them "short ETFs" or whatever, folks seem to think there is, but they are like cats and dogs to me.

 

Shorting a funding source, not an investment.

 

As you put it, there's path dependence and one doesn't end up with same price level for symmetrical moves of a short and a long position, i.e. your returns of 90% and -50%, cumulatively, work out to either -5% or -95% in a long and a short position (your 0.2 should be 0.15). Am I understanding your correctly?

 

Again, I would ask you to provide an example.  If I short something, I sell it and I get the proceeds.  Then you need to make an assumption about those proceeds (what are they used to purchase, does that ever change, etc).  A naked short exposes one to unlimited loss... a -1x ETF does not... so I don't see how then could they ever be equivalent?

 

So the inverse etf does the same as the short position -- which was sort of my starting point ... again, unless I've completely gotten this wrong?

 

I don't mean to annoying (at all!), but just try to create an example where the payoff from shorting is like that of buying a -1x fund.  They are simply not the same... at all.  They are directionally similar, and that is how the marketing pitches them to investors, but they are not what folks think they are.

 

I think what you will see as you noodle on this (or I may be wrong) is that you can construct a long/short *portfolio* that looks like a -1x ETF... but if you model what that portfolio will have to do on a day to day basis to meet it's investment mandate it turns out that the portfolio needs to be adjusted daily to bring it back to a -100% ratio... but I don't have to adjust a short position by itself... so how are they the same?

 

So if you want to say that a -1x ETF is just a short portfolio with the funds from shorts held in cash and rebalanced daily in the direction of market movements to ensure 100% exposure is maintained... well, then I would probably agree that's what (to a rough approximation) a -1x ETF is.  But that isn't equivalent to a short position at all... and it has some seriously interesting behavior based on the path of the underlying.

 

I think of leveraged and short ETFs as basically a long short algo that is momentum driven... buy on the way up, sell on the way down.

 

That's all they do... with huge friction.

[Lance]

Hi guys - great comments.  Very helpful discussion.  What are your thoughts on XIV?

 

Thanks

Lance

[mpf313]

I work in this space so here is my 2 cents. I think some of this has already been discussed, so sorry if I am being repetitive.

 

Over long periods of time there are two factors that will determine your return in the VIX ETFs: contango and the volatility of volatility. Notably, the level of the VIX is not a (major) factor if you hold long enough. Generally the VIX futures are in contango, which gives inverse products like XIV positive roll yield, and products like VXX and UVXY negative roll yield. Also, because a -10% return followed by a +10% return does not get you back to even, these products suffer from the extreme volatility of the VIX futures. For a long XIV position to work out, you will need the positive roll yield to dig you out of the massive one day losses that can occur.

 

An important note for those not familiar with VIX is that, since you cannot own spot VIX, there is no arbitrage to keep the contango between spot and the futures in check like there is in, for example, the oil market. Therefore, the spot VIX and future only need to meet on expiration - they can move independently until then. So VIX future exposure is not the same as spot VIX exposure.  If you want to keep tabs on the VIX futures market vixcentral.com is a good resource.

 

I've found that the best short-vol trade is simply to short UVXY during periods of contango. This trade is long the volatility of volatility and collects the roll yield during contango (~70% of the time). Short VXX is similar to short UVXY, but UVXY's 2x leverage accentuates the benefit of the volatility of volatility. However, it is highly susceptible to blowing up when the VIX futures shoot up. I don't (and won't) do it, but I know some funds that do. The guys at Horizon Kinetics/FRMO are perpetually short UVXY and simply hold substantial cash against it to cover potential margin issues.

 

XIV benefits from positive roll yield but is hurt by the volatility of volatility. A short VXX position would be equivalent to a long XIV position only if you re-set your notional value of short VXX each day (i.e. realize losses when VXX goes up and add to your shorts when it goes down).

 

For those that want to go long volatility, there is not a great way unless the VIX is in backwardation. My (anecdotal) experience would suggest that SPX puts or straddles might be the most cost effective. Long options allow you to define your risk, which you cannot do in the vol ETFs.

 

One method that might be viable is to buy puts on the S&P Low Volatility ETFs (SPLV, USMV). Those ETFs has seen huge inflows this year, all of which are likely weak hands. If the market gains some downside momentum, investors are likely to flee from that ETF, producing higher than historical vol in the underlying stocks, which will make the Low Vol ETF experience high vol, and produce further panic selling. I have not looked at the option prices to see if they reflect this possibility, but they could be a good "value" versus SPX puts.

[benhacker]

Excellent post Mpf.

 

A final thing I would note is to look at the size of the ETFs for vol in question.  They are on the order of $1B AUM (VXX, XIV).  The underlying futures are not that liquid so these funds are automated trading a relatively illiquid market (given their size) and this means the friction they have is high... so again, going "long" any of these products I think is problematic even ignoring roll yield, VIX movements, etc.

[Picasso]

One method that might be viable is to buy puts on the S&P Low Volatility ETFs (SPLV, USMV). Those ETFs has seen huge inflows this year, all of which are likely weak hands. If the market gains some downside momentum, investors are likely to flee from that ETF, producing higher than historical vol in the underlying stocks, which will make the Low Vol ETF experience high vol, and produce further panic selling. I have not looked at the option prices to see if they reflect this possibility, but they could be a good "value" versus SPX puts.

 

+1

[Sunrider]

Thank you - useful thoughts!

 

I work in this space so here is my 2 cents. I think some of this has already been discussed, so sorry if I am being repetitive.

 

Over long periods of time there are two factors that will determine your return in the VIX ETFs: contango and the volatility of volatility. Notably, the level of the VIX is not a (major) factor if you hold long enough. Generally the VIX futures are in contango, which gives inverse products like XIV positive roll yield, and products like VXX and UVXY negative roll yield. Also, because a -10% return followed by a +10% return does not get you back to even, these products suffer from the extreme volatility of the VIX futures. For a long XIV position to work out, you will need the positive roll yield to dig you out of the massive one day losses that can occur.

 

An important note for those not familiar with VIX is that, since you cannot own spot VIX, there is no arbitrage to keep the contango between spot and the futures in check like there is in, for example, the oil market. Therefore, the spot VIX and future only need to meet on expiration - they can move independently until then. So VIX future exposure is not the same as spot VIX exposure.  If you want to keep tabs on the VIX futures market vixcentral.com is a good resource.

 

I've found that the best short-vol trade is simply to short UVXY during periods of contango. This trade is long the volatility of volatility and collects the roll yield during contango (~70% of the time). Short VXX is similar to short UVXY, but UVXY's 2x leverage accentuates the benefit of the volatility of volatility. However, it is highly susceptible to blowing up when the VIX futures shoot up. I don't (and won't) do it, but I know some funds that do. The guys at Horizon Kinetics/FRMO are perpetually short UVXY and simply hold substantial cash against it to cover potential margin issues.

 

XIV benefits from positive roll yield but is hurt by the volatility of volatility. A short VXX position would be equivalent to a long XIV position only if you re-set your notional value of short VXX each day (i.e. realize losses when VXX goes up and add to your shorts when it goes down).

 

For those that want to go long volatility, there is not a great way unless the VIX is in backwardation. My (anecdotal) experience would suggest that SPX puts or straddles might be the most cost effective. Long options allow you to define your risk, which you cannot do in the vol ETFs.

 

One method that might be viable is to buy puts on the S&P Low Volatility ETFs (SPLV, USMV). Those ETFs has seen huge inflows this year, all of which are likely weak hands. If the market gains some downside momentum, investors are likely to flee from that ETF, producing higher than historical vol in the underlying stocks, which will make the Low Vol ETF experience high vol, and produce further panic selling. I have not looked at the option prices to see if they reflect this possibility, but they could be a good "value" versus SPX puts.

[Hawks]

What are some of you guys smoking? Markets are at record highs, world debt loads for individuals, banks, governments, etc are worse than in 2008/2009, and you are buying stuff in this market!!!!!!!!

I thought this was a value investing site which Parsad started.

I own cash, FFH (huge downside insurance), PDH (only in the 1st inning with Parsad's company), and a little bit of GUD (Toronto).

Hope you momentum guys keep this market going, cause I will start to salivate where all this will end. Best of luck to all of you.

[John Hjorth]

What are some of you guys smoking? Markets are at record highs, world debt loads for individuals, banks, governments, etc are worse than in 2008/2009, and you are buying stuff in this market!!!!!!!!

I thought this was a value investing site which Parsad started.

I own cash, FFH (huge downside insurance), PDH (only in the 1st inning with Parsad's company), and a little bit of GUD (Toronto).

Hope you momentum guys keep this market going, cause I will start to salivate where all this will end. Best of luck to all of you.

Thank you Hawks.

[fareastwarriors]

What are some of you guys smoking? Markets are at record highs, world debt loads for individuals, banks, governments, etc are worse than in 2008/2009, and you are buying stuff in this market!!!!!!!!

I thought this was a value investing site which Parsad started.

I own cash, FFH (huge downside insurance), PDH (only in the 1st inning with Parsad's company), and a little bit of GUD (Toronto).

Hope you momentum guys keep this market going, cause I will start to salivate where all this will end. Best of luck to all of you.

 

I keep seeing headlines about markets being at record highs but then I look at my own portfolio and is way down from like 2014/ early 2015...  :'(

 

 

[brendanb22]

Considering BAC warrants or AIG warrants. Thoughts?

[james22]

What are some of you guys smoking? Markets are at record highs, world debt loads for individuals, banks, governments, etc are worse than in 2008/2009, and you are buying stuff in this market!!!!!!!!

I thought this was a value investing site which Parsad started.

I own cash, FFH (huge downside insurance), PDH (only in the 1st inning with Parsad's company), and a little bit of GUD (Toronto).

Hope you momentum guys keep this market going, cause I will start to salivate where all this will end. Best of luck to all of you.

 

+1

[Pauly]

What are some of you guys smoking? Markets are at record highs, world debt loads for individuals, banks, governments, etc are worse than in 2008/2009, and you are buying stuff in this market!!!!!!!!

I thought this was a value investing site which Parsad started.

I own cash, FFH (huge downside insurance), PDH (only in the 1st inning with Parsad's company), and a little bit of GUD (Toronto).

Hope you momentum guys keep this market going, cause I will start to salivate where all this will end. Best of luck to all of you.

 

I didn't realize that the point of a value investing forum was to look at macro factors and determine that there are zero opportunities to be had. I guess I'll come back when all of that stuff has been sorted out...

 

[frommi]

BAC.WTA

[wachtwoord]

What are some of you guys smoking? Markets are at record highs, world debt loads for individuals, banks, governments, etc are worse than in 2008/2009, and you are buying stuff in this market!!!!!!!!

I thought this was a value investing site which Parsad started.

I own cash, FFH (huge downside insurance), PDH (only in the 1st inning with Parsad's company), and a little bit of GUD (Toronto).

Hope you momentum guys keep this market going, cause I will start to salivate where all this will end. Best of luck to all of you.

 

For one there are profitable companies selling for less than tangible book value.

[LC]

What are some of you guys smoking? Markets are at record highs, world debt loads for individuals, banks, governments, etc are worse than in 2008/2009, and you are buying stuff in this market!!!!!!!!

I thought this was a value investing site which Parsad started.

I own cash, FFH (huge downside insurance), PDH (only in the 1st inning with Parsad's company), and a little bit of GUD (Toronto).

Hope you momentum guys keep this market going, cause I will start to salivate where all this will end. Best of luck to all of you.

 

For one there are profitable companies selling for less than tangible book value.

 

Strictly speaking, TBV can be vastly overstated. That has nothing to do with profitability. Take insurers for instance, with massive long-term asset. Is book value the true value of these assets? I'm not sure.

[wachtwoord]

What are some of you guys smoking? Markets are at record highs, world debt loads for individuals, banks, governments, etc are worse than in 2008/2009, and you are buying stuff in this market!!!!!!!!

I thought this was a value investing site which Parsad started.

I own cash, FFH (huge downside insurance), PDH (only in the 1st inning with Parsad's company), and a little bit of GUD (Toronto).

Hope you momentum guys keep this market going, cause I will start to salivate where all this will end. Best of luck to all of you.

 

For one there are profitable companies selling for less than tangible book value.

 

Strictly speaking, TBV can be vastly overstated. That has nothing to do with profitability. Take insurers for instance, with massive long-term asset. Is book value the true value of these assets? I'm not sure.

 

I never bought any insurer or bank because I don't understand those companies (I don't really think any bank in its current form is a valid business without their fake government monopoly of money creation and insurers are full of regulation).

 

It also depends on what you count as tangible. When I talk about this I generally mean current assets minus current AND non-current liabilities. Of course this can still be overstated but its easier to gauge in my opinion. Especially the cash and short term investments entry is quite reliable and there are companies selling for less than that.

[LC]

Fair enough, I'm sure u know there's more "hair" on those types of companies.

 

I'm talking my own book here but I think there's value in the higher end of the quality curve as well. Easier to stomach for me personally.

[randomep]

What are some of you guys smoking? Markets are at record highs, world debt loads for individuals, banks, governments, etc are worse than in 2008/2009, and you are buying stuff in this market!!!!!!!!

I thought this was a value investing site which Parsad started.

I own cash, FFH (huge downside insurance), PDH (only in the 1st inning with Parsad's company), and a little bit of GUD (Toronto).

Hope you momentum guys keep this market going, cause I will start to salivate where all this will end. Best of luck to all of you.

 

I didn't realize that the point of a value investing forum was to look at macro factors and determine that there are zero opportunities to be had. I guess I'll come back when all of that stuff has been sorted out...

 

haha, I barely noticed the sarcasm........

 

so let's see.......

 

- HK real estate companies are selling for 1/3 to 1/4 of the book value of their properties

- Russian companies are selling at 3-4x earnings

- A big South African company is selling for 10x dividends

- I can list profitable Japanese netnet

...... and I can probably go on for a bit longer......

 

 

And so you think the market is ridiculously overvalued?  Ok if you mean the "market" is the S&P 500 fine. But I hardly think the US is the only investment in town.

 

I think that's why guys like Ackman, Sequoia, Pabrai are having such a hard time.  They are trying to squeeze more and more gains from a richly valued US stockmarket.  The world changes you know! There are other places to put your money!

 

 

[LC]

 

- HK real estate companies are selling for 1/3 to 1/4 of the book value of their properties

- Russian companies are selling at 3-4x earnings

- A big South African company is selling for 10x dividends

- I can list profitable Japanese netnet

 

counterpoints for the first two:

-possibly inflated book value (what are the earnings?)

-possibly unsustainable/unreliable earnings (what has reliably flowed to shareholders over the past 5 years?)

 

sometimes cheap is cheap for a good reason, sometimes it's not.

[StevieV]

"A big South African company is selling for 10x dividends"

 

Probably a thread on the board that would make this obvious, but what company?  The only South African company I recall being discussed in depth is Bidvest.

 

Thanks.

[wachtwoord]

Fair enough, I'm sure u know there's more "hair" on those types of companies.

 

I'm talking my own book here but I think there's value in the higher end of the quality curve as well. Easier to stomach for me personally.

 

Yeah I do. I'm not into junk though, the companies I own that are cheap on an assets basis are mostly of decent quality in my opinion. They're just not best of breed or anything. I try to locate small hurdles (and there is still quite some variance in quality in my portfolio).