Macro Tsimmis

intelligently hedged investment

Archive for the ‘A. Investment Strategy’ Category

General posts pertaining to our Intelledgement Macro Strategy Investment Portfolio (IMSIP).

2012 Volatility Plunges as Market Surges

Posted by intelledgement on Wed, 25 Apr 12

Market volatility in the first quarter was the lowest since 2006—before the crash—and the market was up 12%…which is already +12% better than last year. So…“Is it safe?” For the full story, check out “Calm Before The Storm? Volatility Plunges To Utter Quiescence In 1Q12,” published at Seeking Alpha.

Previous volatility-related articles:

Advertisements

Posted in A. Investment Strategy, General | Leave a Comment »

Hedge-Fund-Strategy ETFs Reconsidered

Posted by intelledgement on Thu, 19 Apr 12

Given the success of historical success of hedge funds—according to Greenwich Alternative Investments, who have been tracking hedge fund performance since 1988, the average hedge fund has a compounded annual growth rate of 13% over the past 23 years, as compared to 7% for the S&P 500—it is no wonder that the purveyors of exchange-traded funds (“ETFs”) have contrived to design offerings pegged to various hedge fund strategies. Last month, we published an analysis of eleven ETFs utilizing hedge fund strategies. While the night is young, metaphorically speaking—none of these funds is more than three years old and a couple have been operating less than a year—the early returns were not very impressive: ten out of these eleven funds were trailing the S&P 500 as of the end of 2011. On average, the S&P 500 had performed +5.7% on an annualized basis while the hedge fund ETFs were -1.3%.

Well now it’s a month later, and the skies have darkened considerably. The S&P 500 had a great first quarter; the ETF hedgie wannabes…not so much:

ETF—30 Mar 12 Symbol Inception CAGR SPY CAGR PR
Credit Suisse Long/Short Liquid Index CSLS 22-Feb-10 5.71% 15.56% -10
IQ ARB Merger Arbitrage ETF MNA 17-Nov-09 1.42% 14.00% -13
IQ CPI Inflation Hedged ETF CPI 27-Oct-09 1.82% 16.42% -15
IQ Hedge Macro Tracker ETF MCRO 09-Jun-09 3.94% 18.89% -15
New iShares Diversified Alternatives Trust ALT 16-Nov-09 -1.52% 14.25% -16
Exchange Traded Notes due March 13, 2031 Linked on a Leveraged Basis to the Credit Suisse Merger Arbitrage Liquid Index CSMB 16-Mar-11 -0.97% 15.88% -17
IQ Hedge Multi-Strategy Tracker QAI 25-Mar-09 4.48% 24.05% -20
Credit Suisse Merger Arbitrage Liquid Index CSMA 04-Oct-10 1.21% 20.90% -20
ProShares Hedge Replication ETF HDG 14-Jul-11 -1.71% 18.23% -20
WisdomTree Global Real Return Fund RRF 14-Jul-11 -6.22% 18.23% -25
WisdomTree Managed Futures Strategy Fund WDTI 05-Jan-11 -10.90% 14.02% -25
  • Sources = ETFdb for list of pertinent ETFs, Yahoo! for historical price data
  • CAGR = compounded annual growth rate…annualized ROI for this ETF since inception including dividends
  • SPY CAGR = annualized ROI of the SPDR S&P 500 ETF including dividends since inception of the pertinent ETF
  • PR = Performance Rating, viz., the difference between the CAGRs of the SPDR S&P 500 ETF and each hedge-fund ETF since its inception (the higher, the better for the hedge-fund ETF)

Now all eleven ETFs are losing to the market, and losing big: by an average PR of 17. This is because the market is on average +17% annualized while the hedge-fund-strategy ETFs are flat. These numbers look bad…really bad.

However, one reader—BlackDragonFund—posted a pertinent comment on our earlier article:

YOUR CASE THAT THE HEDGIE ETFS FALL SHORT IS NOT PERSUASIVE…THE REAL QUESTION IS, HOW HAVE THEY DONE RELATIVE TO REAL HEDGE FUNDS…WE KNOW (ACCORDING TO YOUR DATA) THAT HEDGE FUNDS IN THE LONG RUN OUTPERFORM THE MARKET, BUT WHAT IF THE HEDGIES OVERALL JUST HAPPEN TO BE LAGGING THE MARKET FOR THE PAST COUPLE OF YEARS? IF THAT IS HAPPENING, THEN THE ETFS ARE FAITHFULLY MIRRORING A STRATEGY THAT IN THE LONG RUN IS STILL LIKELY TO PAY OFF.

Well…it is the case that hedge funds overall have generally been—uncharacteristically—underperforming the market for the past year or two. So we went back and checked to see how each ETF was doing relative to its appropriate hedge fund forbears. We again used the Greenwich Alternative Investments data, which include historical performance for hedge funds following several disparate strategies.

ETF—30 Mar 12 Symbol Inception CAGR Pertinent GAI Category GAI CAGR PR
Credit Suisse Long/Short Liquid Index CSLS 22-Feb-10 5.71% Greenwich Global Long/Short Equity Group Index 4.75% 1
IQ Hedge Macro Tracker ETF MCRO 09-Jun-09 3.94% Greenwich Global Macro Index 4.37% -0
IQ CPI Inflation Hedged ETF CPI 27-Oct-09 1.82% USA Inflation Rate 2.48% -1
New iShares Diversified Alternatives Trust ALT 16-Nov-09 -1.52% Greenwich Global Equity Market Neutral Index 0.89% -2
IQ Hedge Multi-Strategy Tracker QAI 25-Mar-09 4.48% Greenwich Global Multi-Strategy Index 7.47% -3
Credit Suisse Merger Arbitrage Liquid Index CSMA 04-Oct-10 1.21% Greenwich Global Merger Arbitrage Index 5.88% -5
IQ ARB Merger Arbitrage ETF MNA 17-Nov-09 1.42% Greenwich Global Merger Arbitrage Index 6.78% -5
Exchange Traded Notes due March 13, 2031 Linked on a Leveraged Basis to the Credit Suisse Merger Arbitrage Liquid Index CSMB 16-Mar-11 -0.97% Greenwich Global Merger Arbitrage Index 4.51% -6
ProShares Hedge Replication ETF HDG 14-Jul-11 -1.71% Greenwich Global Long-Short Credit Index 4.96% -7
WisdomTree Managed Futures Strategy Fund WDTI 05-Jan-11 -10.90% Greenwich Global Futures Index -2.56% -8
WisdomTree Global Real Return Fund RRF 14-Jul-11 -6.22% USA Inflation Rate 2.23% -8
  • Sources = ETFdb for list of pertinent ETFs, Yahoo! for historical price data, GAI for hedge fund index performance data
  • CAGR = compounded annual growth rate…annualized ROI for this ETF since inception including dividends
  • Pertinent GAI Category = the Greenwich Alternative Investments hedge fund index most closely related to that ETF
  • GAI CAGR = annualized ROI of that GAI hedge fund index since inception of the pertinent ETF
  • PR = Performance Rating, viz., the difference between the CAGRs of the pertinent GAI hedge fund index and each hedge-fund ETF since its inception (the higher, the better for the ETF)

OK then. These results are still not good, but they are no where near unmitigated-disaster territory. On average, the real hedge funds are up about 4% on an annualized basis compared to the flat performance, on average, of the hedge-fund-strategy ETFs. One of the eleven ETFs is actually beating the real hedge funds and two more are just narrowly behind: less than a percentage point.

It is still very early in the game. Even the 24 years of hedge fund performance data we have is not a lot (although it is more than enough to be confident that the 13%-to-7% performance advantage hedge funds have over the market is statistically significant); the oldest of these ETFs has been around barely three years. So while these preliminary data are not very encouraging, it’s definitely too soon to write off the hedge-fund-strategy ETFs as a definitive failure.

Indeed—though it is rank speculation at this early juncture—if the ETFs continue to trail the real hedge funds by an average of 4% on an annualized basis, and the real funds rebound to their historical average outperformance versus the market of around +6%, that implies that the ETFs, even though they are egregiously lagging the market so far, would have a reasonable chance to outperform by +2% or so in the fullness of time.

As we observed last month, investors have pretty much been indifferent to the advent of these new hedge-fund-strategy-based ETFs. None of them have attracted anywhere near $1 billion of investment dollars or serious trading volume. But in the long run, if they can stick so close to their rich uncles, while they are not likely to attract attention from the 1%—or make you rich—they could eventually constitute a decent enough alternative to be worthy of legitimate consideration by long-term investors.

Posted in A. Investment Strategy, General | Tagged: , , , , , , , , , , | Leave a Comment »

Is Gold Overpriced?: A Macro View

Posted by intelledgement on Fri, 30 Mar 12

…[T]he price of gold is up sharply of late: roughly 5% so far this year, 10% in 2011, 30% in 2010, and 24% in 2009. Gold has clearly been appreciating in value faster than the dollar has been declining for the past few years. So, even taking into account the risks of a default in Europe, a war with Iran, a recession in the U.S., a growth slowdown or worse in China and India and so on…is gold overvalued here?

Published earlier today by The Motley Fool, this article graphs the price of gold versus the decline in the value of the dollar to determine how much of the former is explained by the latter. (Spoiler: probably less than you think.)

Posted in A. Investment Strategy, General | Tagged: , , , , , , , , , | Leave a Comment »

Hedge Fund ETFs—Hedge Funds for the Rest of Us?

Posted by intelledgement on Fri, 09 Mar 12

In the last couple of years…the same folks who brought us the exchange-traded fund revolution have attempted to cash in on hedge fund mania by offering ETFs that aim to generate hedge-fund-like returns—or, at least, to follow one or more of the strategies that have generated such returns. So far, the reception for these “hedge funds for the rest of us” has been decidedly underwhelming.… But let’s take a closer look to see if there are any diamonds in the rough among them.

Historically, the average hedge fund beats the market handily. This article published by The Motley Fool earlier today evaluates the performance of hedge fund ETFs in comparison to the S&P 500 to see how well the success of their progenitors is carrying over to the new generation…or not.

Posted in A. Investment Strategy, General | Tagged: , , , , , , , , , , , , , , , , , , , , , , , , , , | Leave a Comment »

McRIBS Reconsidered: Taking Currency Fluctuations Into Account

Posted by intelledgement on Tue, 27 Dec 11

A few weeks ago, we published an article reviewing the performance of the stock markets of 16 nations—including all the BRICs—for the first 10 years of the 21st century…. An astute commenter pointed out that my analysis hadn’t factored in the decline of the dollar. The commenter stated that the dollar had declined 20% in value in the first 10 years of the century—it turns out that inflation from 2001-2010 inclusively actually amounted to a cumulative 21%—and thus, he complained that the chart showed the S&P 500 value as flat for the decade (a compounded annual growth rate of fractionally less than 0%) when in reality the absolute value of an investment in the S&P 500 from 2001 to 2010 would have been down by 20% or so. Now, all the bourse indexes were valued in terms of the nominal value of their respective currencies…. However, using nominal native currencies over 10 years actually does not necessarily provide a perfectly level playing field, because it ignores currency fluctuations. In looking at the changes in value for each currency relative to the dollar over the decade, these were not insignificant.

And so this sequel article published earlier today by The Motley Fool, Reconsidering the “New” BRICs, adds in the effects of ten years of currency fluctuations. Turns out some markets—e.g., Australia up 4% annually for ten years in nominal terms but up 10% annually when we take the appreciation of the Australian dollar into account—did materially better…and some did worse.

Posted in A. Investment Strategy, General | Tagged: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , | Leave a Comment »

Out with the BRICs and in with McRIBS

Posted by intelledgement on Thu, 20 Oct 11

It has been a decade since Goldman Sachs economist Jim O’Neill coined the acronym “BRIC” (Brazil-Russia-India-China) as a handy shorthand term for emerging-market economies that were likely to experience above-average growth in the process of converting from predominantly rural, agrarian living to more urban, industrial modes.… [T]here’s not much debate among macro-analysts as to the continued robust validity of O’Neill’s basic insight. It would take a lollapalooza of a black swan to dissipate the inertia of the BRICs—something on the order of an epidemic or a catastrophic natural disaster that killed many millions. So, in that light, the pertinent question is not where the BRICs bus is headed, but rather, who is going along for the ride.

And that question is the focus of Forget the BRICs; Here’s a Better Way to Think About Emerging Markets, published earlier today by The Motley Fool.

Posted in A. Investment Strategy, General | Tagged: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , | Leave a Comment »

Motley Fool CAPS Roundtable: Inflation, Deflation, and Your Portfolio

Posted by intelledgement on Wed, 14 Oct 09

We got to participate in a discussion about this topic with another CAPS member and the results—posted on The Motley Fool website—were pretty interesting (in our unbiased opinion LOL).

Posted in A. Investment Strategy, General | Tagged: , , , , , , , , | Leave a Comment »

Performance and Volatility: an Inverse Relationship

Posted by intelledgement on Wed, 14 Oct 09

Volatility in the ebb and flow of the S&P 500’s valuations declined for the third straight quarter in 3Q09. The average daily change in the value of the S&P 500 index for 3Q09 was ±0.8%, down sequentially from ±1.3% in 2Q09, from ±2.0% in 1Q09, and a nightmarish ±3.3%—the highest level of volatility in a quarter since the inception of the S&P 500 index—in 4Q08 (as discussed in the previous articles, This Volatility is Off the Charts! in April 2009 and Not Your Father’s Market Volatility in July 2009).

For the entire year, 2009 at ±1.3% overall is still on track to be the second most volatile year on record—2008 set a new record at ±1.7%—but if the calming trend continues through 4Q09, we may drop below the pre-2008 record ±1.2% posted in 2002. Still, at this point we remain 118% more volatile than “normal” (namely, the all-time average daily change in the value of the S&P 500 index, which is ±0.6%).
1950-3Q09_s&p_volatility

Why do we care? Well, if you are a short-term trader, obviously more volatility is a good thing, because the opportunities for you to profit are larger and more frequent. But it turns out that if you are a long-term investor, volatility is bad news. In general, higher volatility is associated with a lower return-on-investment. Indeed, the big peaks in the above chart—when the S&P 500 experienced unprecedented volatility—were all negative ROI years: 1974 -30%, 2002 -23%, and 2008 -38%. In fact, not merely negative, but the worst three years in the history of the S&P 500 index.

But wait, there’s more! It isn’t just peak volatility that hurts. In general, the higher the volatility, the worse the ROI. Check out this chart measuring performance at various levels of volatility:

ROIvsVolatility

To build this chart, we calculated the ROI for the S&P 500 index for each year since 1950, and then sorted those years by the average daily change in the S&P 500 index—up or down. Clearly if you are a long-term investor seeking a 10%-or-better annual ROI, you want to root for average daily volatility around ±0.6% or less. In years when average daily volatility has exceeded ±0.8%, the S&P 500 has a negative ROI, including those three major meltdown years.

We also did a little vector analysis. Since 1950, there were 29 years in which volatility declined from the prior year and in 18 of those (62% of the time), performance improved compared to the prior year. There were 30 years in which volatility increased from the prior year, and in 24 of those (80% of the time) performance was worse than the prior year.

We are not saying that volatility causes market declines; in fact, it presumably works the other way round. But if you are a long term investor and detect a rise in volatility, be prepared for an increased probability of sub-par performance by the stock market.

Posted in A. Investment Strategy, B. Speculative Tactics, General | Tagged: , , , , , , , , | Leave a Comment »

Still not your father’s volatility

Posted by intelledgement on Fri, 03 Jul 09

The second quarter of 2009 is over and there’s good news and bad news on the volatility front.

First the good news: the average daily change in the value of the S&P 500 index for 2Q09 was ±1.3%, down sequentially for the second consecutive quarter from ±2.0% in 1Q09 and a nightmarish ±3.3%—the highest level of volatility in a quarter since the inception of the S&P 500 index—in 4Q08.

The bad news is that we still have a long way to go to get back to what we like to think of as “normal”—March 1957-to-June 2007, when the average daily change in the value of the S&P 500 index was ±0.6%, and more than half the time—53% of all market sessions during those 50 years—the change in the index rounded to the nearest whole number was 0%. We had such quiescent sessions just 29% of the time in 2Q09.

While the immediate trend shows dampening volatility, on a year-over-year basis, so far 2009 is looking much more volatile than 2008. 1Q09 was 57% more volatile than 1Q08 and 2Q09 was 67% more volatile than 2Q08. This is deceptive, however, because the vast majority of the craziness in 2008 occurred during the second half of the year. Through the first six months of 2009, we are seeing an average daily change of ±1.6% which looks bad compared to the first six months of 2008 (±1.2%) but is squeezing in under the full year 2008 figure of ±1.7%. Unless things become unglued again down the stretch in 2009, the year-over-year comparables are likely to get considerably better.

So, who cares about volatility levels? Well…you do…or at least if you are a long-term investor you should.

In April, we reported that during the 50 years when the market experienced daily volatility averaging ±0.6%, it performed well, and that the poor performance that has pundits proclaiming the death of “buy-and-hold” as a viable strategy is associated with this volatility singularity that we are currently experiencing: daily volatility of ±1.5%—150% higher than normal!—for the last two years. To gain that outlook, we analyzed daily performance data between the present and March 1950, but in conducting subsequent research, we determined that the S&P 500 per se was created in March 1957. The earlier performance data posted on Yahoo! is presumably derived.

Excluding the 1950-to-1957 data is painful, because the market was up a compounded annual growth rate of 14% in that period, but doing so doesn’t change the overall picture: market performance when volatility was low—your father’s volatility—is generally good. Here is a decade-by-decade S&P 500 index performance summary:

Date Price Volatility 10-yr ROI 10-yr CAGR All-time ROI All-time CAGR
04-Mar-57 44.06 n/a n/a n/a n/a n/a
03-Mar-67 88.29 0.39 100.39% 7.20% 100.39% 7.20%
04-Mar-77 101.20 0.56 14.62% 1.37% 129.69% 4.25%
04-Mar-87 288.62 0.60 185.20% 11.05% 555.06% 6.47%
04-Mar-97 790.95 0.54 174.05% 10.61% 1695.17% 7.49%
29-Jun-07 1,503.35 0.79 90.07% 6.42% 3312.05% 7.27%
30-Jun-09 919.32 1.48 -33.73% -16.19% 1986.52% 5.98%

Date = end-date in the time period
Price = final closing price of S&P 500 index for that time period
Volatility = average daily change in absolute value (up or down) of S&P 500 index for the previous ten years
10-yr ROI = total return-on-investment for the previous ten years
10-yr CAGR = compounded annual growth rate for the previous ten years
All-time ROI = return-on-investment since 4 Mar 57
All-time CAGR = compounded annual growth rate since 4 Mar 57

Note that we adjusted the 2007 decade by 90 days to include the last “calm” quarter and isolate the high-volatility quarters into their own decade. And, obviously, the “decade” ending 30 Jun 09 comprises just two years of data.

So, a belated Happy Fathers’ Day to all…and here’s hoping for more of them, volatility-wise, for the rest of 2009 and beyond.

Posted in A. Investment Strategy, General | Tagged: , , , , , , , , , , | Leave a Comment »

Ultra inverse ETFs fall short of expectations

Posted by intelledgement on Mon, 05 Jan 09

Aide: We’ve analyzed their attack, Sir, and there is a danger. Should I have your ship standing by?
Grand Moff Tarkin: Evacuate? In our moment of triumph? I think you overestimate their chances.

Intelledgement’s strategy is macro-based, which means we analyze broad trends and make investments designed to align with them. Thus if we expect energy and China and Brazil to do better than average in the long run, we will seek to go long (buy) securities that are likely to reflect those successes. Conversely, if expect an economic reversal that will hurt real estate values and depress consumption, we will seek to go short (sell) securities that are likely to decline in price.

Generally, we do not recommend owning (or shorting) individual stocks for most of our clients, because it is easier to be right with a more broadly targeted mutual fund or exchange-traded fund (ETF)—which invest in numerous stocks—than trying to divine the fate of a single company (which could run into accounting problems and tank even if the industry they are in does well overall, for example). And very few of our clients are comfortable with margin accounts and short selling, which is inherently more risky than buying stock (as we have explained elsewhere). Therefore, the tactic we employ to invest money on the short side when the macros so dictate is buying so-called “inverse” ETFs, such as our current position in the the ProShares UItraShort S&P 500 ETF, which is designed to “correspond to twice (200%) the inverse (opposite) of the daily performance of the S&P500® Index,” using short sales, options, derivatives, and other relatively arcane maneuvers. This enables us to take a virtual short position without employing margin or undertaking the theoretically unlimited risk associated with an actual short position.

Now, while ETFs have been around for 20 years, it wasn’t until 1998 when State Street introduced “Sector SPDRs” that it became possible to employ a robust macro strategy using exchange-traded funds. And even then, it was not possible to bet against sectors or national indexes or commodities other than by selling the requisite ETF short. Until 2006, that is, when Proshares introduced their line of inverse ETFs, that go up when the targeted index goes down, and vice versa. So inverse ETFs, including “ultra” inverse funds—which aspire to double (or triple) inverse performance—don’t have a long performance track record.

Ultrashort ETFs—along with their ultralong cousins—have commonly been regarded as the Deathstars of exchange-traded fund investing. Afterall, it stands to reason, if you are absolutely convinced that the price of oil is going down, why be content with an mere inverse fund oil fund when you can buy an ultrashort fund that tracks 2x the inverse of any change in the price of oil?

One concern that commentators have pointed out is that the design of the funds—to reflect the inverse of fund performance on a daily basis—gives them an inherently bearish bias in a volatile environment, because mathematically, an x% move down always trumps an x% move up. That is, if you start at 100 and have a 10% up day followed by a 10% down day, you end up at 99; and by the same token if again starting at 100 you have a 10% down day followed by a 10% up day, again you end up at 99. A slow and steady move in either direction minimizes this effect, but it is likely to be augmented when volatility is high, as demonstrated by Eric Oberg in his thestreet.com article last month.

Of course, we don’t have a lot of performance data to analyze—as the inverse ETFs are so new—but let’s take a gander at the data we do have:

Security Symbol Inception Cost Value ROI Index Index ROI Rating
Cons Svs Ultrashort SCC 02-Feb-07 46.47 84.78 82% DJUSCY -39% +3
S&P500 Short SH 21-Jun-06 55.81 72.02 29% GSPC -28% +1
DOW30 Short DOG 21-Jun-06 57.69 68.55 19% DJI -21% -2
QQQ Short PSQ 21-Jun-06 60.43 73.03 21% IXIC -26% -5
Cons Goods Ultrashort SZK 02-Feb-07 52.92 74.01 40% DJUSNC -24% -8
Oil & Gas Short DDG 22-Jul-08 57.72 68.16 18% DJUSEN -35% -17
S&P500 Ultrashort SDS 13-Jul-06 57.28 70.94 24% GSPC -27% -31
DOW30 Ultrashort DXD 13-Jul-06 51.33 53.56 4% DJI -19% -34
QQQ Ultrashort QID 13-Jul-06 60.79 57.35 -6% IXIC -23% -52
Financials Short SEF 22-Jul-08 68.32 76.03 11% DJUSFN -66% -54
Financials Ultrashort SKF 01-Feb-07 66.74 103.01 54% DJUSFN -55% -57
Oil & Gas Ultrashort DUG 22-Jul-08 26.45 25.04 -5% DJUSEN -35% -75
R/E Ultrashort SRS 01-Feb-07 62.07 50.71 -18% DWRSF -60% -138

Security = the name of the exchange-traded fund (ETF)
Symbol = the symbol of the ETF
Inception = date the ETF started trading
Cost = closing price of the ETF on the first day it traded
Value = closing price of the ETF on 31 December 2008
ROI (Return on Investment) = on a percentage basis, the performance of this ETF from inception to 31 Dec 08
Index = the market index the ETF is tracking (inversely)
Index ROI = on a percentage basis, the performance of this index from inception of the associated ETF to 31 Dec 08
Rating = how well the ETF has performed relative to expectations (see notes below)

Notes: our rating is derived by comparing the ROI of the inverse ETF with the ROI of the index it is tracking and calculating how the ETF has performed relative to expectations. For example, if the underlying index declined 10% since the inception of the fund, we would expect an inverse fund to be +10%, and an ultra inverse fund—which, you will recall, strives to log 2x or 3x the inverse performance of the underlying index—to be either +20% or +30%. So, if the index has declined by 10% and an inverse ETF is up 10%, that yields a rating of 0 (zero), as it matches our expectations. For example, as of 31 December 2008, the Proshares S&P 500 Short fund (SH) was up 29% since inception while the S&P 500 index itself (GSPC) was down 28%…so that ETF has a rating of +1. In contrast, Proshares Real Estate Ultrashort fund (SRS) is down 18% since inception while the index it tracks is down 60%…we would expect SRS to be +120% and thus it has a rating of -138.

In general, the news is bad for the “ultrashort” 2x funds. Every single one of the eight ultrashort funds we analyzed are tracking an index that was down through 31 Dec 08…and therefore we would expect them all to be up twice as much as their respective index was down. This was true of only one: the Consumer Services Ultrashort ETF (SCC), which was up 82% while the Dow Jones US Consumer Services Index (DJUSCY) was down 39%. Four of the remaining seven ETFs were up, but only one of them was close to expectations: the Consumer Goods Ultrashort ETF (SZK), was up 40% while the underlying index was down 24%. The Financials Ultrashort ETF (SKF) was up 54%, but that was less than half what it should have done relative to its index, which was down 55%. And the S&P 500 Ultrashort ETF (SDS) was up 24%, less than half what it should have done relative to the GSPC, down 27%. The DOW 30 Ultrashort was up 4%…way lower than it should have been with the DJI down 19%.

From there, it gets really bad. The other three ultrashort funds were all down, even though with their respective index down, they should have been up sharply. We would have expected the QQQQ Ultrashort ETF (QID) to be up 46%…but it was down 6%. We would have expected the Oil & Gas Ultrashort ETF (DUG) to be up 70%…but it was down 5%. And the SRS was discussed above (should have been +120%, was -18%).

And it gets still worse! In every case where there are both an inverse ETF (targeting mirror image performance of the underlying index) and an ultra inverse ETF (targeting 2x inverse performance), the performance of the inverse ETF is relatively better than that of the ultra inverse ETF:

Index Short Fund Ultrashort Fund
S&P 500 +1 -31
DOW 30 -2 -19
QQQQ -5 -52
Oil & Gas -17 -75
Financials -54 -57

In absolute terms, the SKF ultrashort financials ETF still outperformed SEF, the inverse ETF (as you would expect when they both underperformed their expectations by about the same degree). But in the other four instances, the four inverse funds not only did relatively better, but beat their ultrashort cousins in absolute ROI. The DUG and QID ultrashort ETFs actually lost money, even though their respective indices each was in the red.

While this does not prove Oberg is correct in his analysis that volatility is doing in the ultrashort ETFs, it does constitute prima-facie evidence that his conclusion—the ultrashort ETFs are underperforming—is on target.

And accordingly, it is time to consider evacuating the Deathstar.

Posted in A. Investment Strategy, General | Tagged: , , , , , , , , , , , , | 1 Comment »