Weird ETF I own
I am investing since more than two decades now and in the constant research for the strategy or product that will make me rich (which does not exists) I bought some out-of-the-ordinary products, some of which I still own.
The core of my portfolio are standard stocks and bonds but I dedicated a small part to fringe strategies to educate myself and, to be honest, to keep me interested: after you realise it is very hard to do better than a 60/40 mix, once you can stomach the volatility, financial life tends to get pretty boring.
XTXC
This ETF tracks the performance of the Markit iTraxx Crossover 5-year Total Return Index. The index measures the return for a credit protection seller holding the most current issue of the iTraxx Crossover credit derivative; the performance of the index is generated by three factors: running yield of the CDS (carry), change in CDS prices and the running yield from the funding component (EONIA rate).
XTXC performs like an insurance company: collects premiums and suffer losses when the insured companies defaults; ETF returns are therefore correlated to the stock market (recessions, defaults and market dips are not fully correlated but rhyme well), but returns are steadier and drawdowns less violent. In the last ten years, the index returned 7% annualised with less than 9% volatility. Future returns will likely be lower since the current negative EONIA represent a drag on the fund performance.
This is the closer type of investment I found to p2p lending, with the advantage of having a liquid market every day and the disadvantage that your counter-party is Deutsche Bank, so default risk is not exactly zero.
This ETF tracks the performance of the Markit iTraxx Crossover 5-year Total Return Index. The index measures the return for a credit protection seller holding the most current issue of the iTraxx Crossover credit derivative; the performance of the index is generated by three factors: running yield of the CDS (carry), change in CDS prices and the running yield from the funding component (EONIA rate).
XTXC performs like an insurance company: collects premiums and suffer losses when the insured companies defaults; ETF returns are therefore correlated to the stock market (recessions, defaults and market dips are not fully correlated but rhyme well), but returns are steadier and drawdowns less violent. In the last ten years, the index returned 7% annualised with less than 9% volatility. Future returns will likely be lower since the current negative EONIA represent a drag on the fund performance.
This is the closer type of investment I found to p2p lending, with the advantage of having a liquid market every day and the disadvantage that your counter-party is Deutsche Bank, so default risk is not exactly zero.
SVXY
ProShares Short VIX Short-Term Futures ETF provides short exposure to the S&P 500 VIX Short Term Futures Index (-0.5x), which measures the returns of a portfolio of monthly VIX futures contracts with a weighted average of one month to expiration.
The main point here is that the ETF aim to replicate its benchmark for a single day. Due to compounding of daily returns, ETF returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period. What does it mean? Check what happened to XIV: XIV was a popular way to short VIX futures, earning a premium for insuring buyers against a spike in the VIX. From inception till the end of 2017, XIV earned over 40% annualised, it then lost 90% of its value in two days.
The long term expected value of this ETF is zero and if you hold it as a long term investment, it is likely that you will lose all or a substantial part of your investment. So why I bought it?
The ETF is volatile enough that if I sell all the profits at the end of each year, I will still end up with a profit if the catastrophic event happens at least after three years from the purchase. You can find the original article for this strategy here.
Do not be greedy as some guys that invested WITH LEVERAGE in this strategy.
ProShares Short VIX Short-Term Futures ETF provides short exposure to the S&P 500 VIX Short Term Futures Index (-0.5x), which measures the returns of a portfolio of monthly VIX futures contracts with a weighted average of one month to expiration.
The main point here is that the ETF aim to replicate its benchmark for a single day. Due to compounding of daily returns, ETF returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period. What does it mean? Check what happened to XIV: XIV was a popular way to short VIX futures, earning a premium for insuring buyers against a spike in the VIX. From inception till the end of 2017, XIV earned over 40% annualised, it then lost 90% of its value in two days.
The long term expected value of this ETF is zero and if you hold it as a long term investment, it is likely that you will lose all or a substantial part of your investment. So why I bought it?
The ETF is volatile enough that if I sell all the profits at the end of each year, I will still end up with a profit if the catastrophic event happens at least after three years from the purchase. You can find the original article for this strategy here.
Do not be greedy as some guys that invested WITH LEVERAGE in this strategy.
NTSX
The WisdomTree 90/60 US Balanced Fund seeks total return by investing in large-capitalisation US securities and US Treasury future contracts. It is a 60% equity / 40% bond portfolio with leverage, so that you can use the capacity created by leverage to increase exposure to diversifying assets, like commodities, alternatives or...the above SVXY.
Even a 60/40 portfolio can be prone to periods of significant drawdowns, adding uncorrelated assets in a capital efficient way can enhance the total volatility and drawdown profile of the overall portfolio.
Quick caveat on timing: right now US large cap equities valuations are considered 'expensive' by some analysts while US rates are low, buying these assets with leverage can not be the best idea timing wise.
The WisdomTree 90/60 US Balanced Fund seeks total return by investing in large-capitalisation US securities and US Treasury future contracts. It is a 60% equity / 40% bond portfolio with leverage, so that you can use the capacity created by leverage to increase exposure to diversifying assets, like commodities, alternatives or...the above SVXY.
Even a 60/40 portfolio can be prone to periods of significant drawdowns, adding uncorrelated assets in a capital efficient way can enhance the total volatility and drawdown profile of the overall portfolio.
Quick caveat on timing: right now US large cap equities valuations are considered 'expensive' by some analysts while US rates are low, buying these assets with leverage can not be the best idea timing wise.
LOWV
The objective of the SPDR S&P500 Low Volatility is to track the equity market performance of large US companies which historically have exhibited low volatility characteristics.
You can find an explanation of the low volatility equity factor here. The CAPM predicts a positive relationship between risk and return, however in the last five decades defensive stocks have delivered higher returns than the most aggressive stocks. The low-volatility anomaly has been demonstrated to exist in equity markets around the globe.
Factor investing is mainstream now, so this ETF does not really qualify as weird, I decided to include it here because I wanted you to check its recent performance. Obviously past performance is no guarantee of bla bla bla, so sorry if you missed the train on this one. I still believe it will continue to overperform in the future, just do not go all-in but build your position over time, using the sure-to-come periods of underperformance (to give you an idea, value factor underperformed for 10 years, this is the type of horizon I am referring to).
The objective of the SPDR S&P500 Low Volatility is to track the equity market performance of large US companies which historically have exhibited low volatility characteristics.
You can find an explanation of the low volatility equity factor here. The CAPM predicts a positive relationship between risk and return, however in the last five decades defensive stocks have delivered higher returns than the most aggressive stocks. The low-volatility anomaly has been demonstrated to exist in equity markets around the globe.
Factor investing is mainstream now, so this ETF does not really qualify as weird, I decided to include it here because I wanted you to check its recent performance. Obviously past performance is no guarantee of bla bla bla, so sorry if you missed the train on this one. I still believe it will continue to overperform in the future, just do not go all-in but build your position over time, using the sure-to-come periods of underperformance (to give you an idea, value factor underperformed for 10 years, this is the type of horizon I am referring to).
GAA
I am a huge fan of Meb Faber, who created this ETF that aims to reflect the market portfolio of investable assets. At 0% cost (you will still pay fees on the underlying funds though) you can have a truly global exposure, not bad! You can find the specifics of the strategy here.
I consider this as the no-stress ETF, park your money here and go live your life...or not? Unfortunately doing the right thing can be painful sometimes: the fund is tilted towards international and value exposure, positions that underperformed in the last decade if compared to the S&P500. Be also aware that the ETF is created with a US dollar investor in mind, if you live in Europe like me you will be exposed to USD fluctuations.
What about you? Do you have any interest in a particular ETF? Share it in the comments!
What I am reading now:
I am a huge fan of Meb Faber, who created this ETF that aims to reflect the market portfolio of investable assets. At 0% cost (you will still pay fees on the underlying funds though) you can have a truly global exposure, not bad! You can find the specifics of the strategy here.
I consider this as the no-stress ETF, park your money here and go live your life...or not? Unfortunately doing the right thing can be painful sometimes: the fund is tilted towards international and value exposure, positions that underperformed in the last decade if compared to the S&P500. Be also aware that the ETF is created with a US dollar investor in mind, if you live in Europe like me you will be exposed to USD fluctuations.
What about you? Do you have any interest in a particular ETF? Share it in the comments!
What I am reading now:
Follow me on Twitter @Nprotasoni
Comments
Post a Comment