At one point I was hazy about the internal workings of leveraged and inverse ETFs, so I constructed models of hypothetical 2X and -1X Apple ETFs to clarify my understanding. I ignored a whole host of issues (e.g., regulatory, cost-effective leverage), but even a simple model of a leveraged ETF can hurt your brain. The basic inverse and leverage mechanisms shown below are essentially the same for …
It’s clear that the volatility ETN/ETFs have begun to dominate the VIX Futures market. What isn’t clear is whether it matters. Volatility isn’t a commodity like gold or corn that is physically limited, so future position limits don’t seem applicable. When the price of VIX futures is attractive, more can be created—and appropriate hedges put in place. But are these hedges distorting the overall market? …
Since Credit Suisse’s recent pause on TVIX share creations I have been trying to figure out some of the hedging / rebalancing dynamics underlying the current crop of volatility ETNs and ETFs. Traditional equity ETFs like SPY, the S&P 500 index tracking fund don’t require much behind-the-scenes action. Shares are created or redeemed in conjuction with baskets of securities changing hands. The only dynamic part …
Gold, loved by many and disdained by at least a few (including Warren Buffett) is an unusual investment. It won’t grow, doesn’t offer a dividend, and other than jewelry and some industrial uses it gets stuck in guarded vaults for safe keeping. With no positive cash flow associated with it, the value of gold is whatever the market says it is. In the past …
In February 2012 VelocityShares‘ TVIX ETN was on a tear. Its volume surged from an average of 6.67 million shares a day in January to 22 million shares a day in February. The assets under management (AUM) also grew dramatically. At the end of January TVIX had $413 million in assets—fourteen days later it has $279 million more for a total of $691.0 million. Credit …
