For the last 6 months to one year, we have been hearing the professionals talk about the “risk on” and “risk off” trades. The meaning of these trades has confused many investors as to what and how to interpret and conduct these trades. Finally, we have a definitive answer and an easy way to make these trades.
Two market veterans, Dennis Gartman and Mark Fischer, have developed the idea of using two ETN (exchange traded notes) that provide investors a method to trade the “risk on” and “risk off” type of ideas popular in today’s investing landscape. Exchange-traded Notes are senior, unsecured, unsubordinated debt securities that provide investors with exposure to the total returns of various market indices, including those linked to stocks, bonds, commodities and/or currencies. UBS Investment Bank announced that December 1 2011 is the first day of trading on the NYSE for the following two new ETRACS Exchange Traded Notes (“ETNs”) linked to the daily performance of The Fisher-Gartman Risk Index:
- ETRACS Fisher-Gartman Risk On ETN (the “Risk On ETN”) Ticker: ONN
- ETRACS Fisher-Gartman Risk Off ETN (the “Risk Off ETN”) Ticker: OFF
Investors now have the ability to implement comprehensive “risk on” and “risk off” trades through the purchase of these new exchange-traded securities, ONN and OFF.
According to the UBS press release, the Risk On ETN provides investors with the ability to implement a comprehensive “risk on” trade through the purchase of a single, exchange-traded security, ONN. The Risk On ETN provides long exposure to the daily performance of The Fisher-Gartman Risk Index. As such, investors gain exposure to an index comprised of long positions in “risk on” instruments and short positions in “risk off” instruments linked to commodities, equities, currencies and sovereign bonds. The Risk On ETN’s value is expected to rise when the outlook on markets and the broader economy is positive and to decrease when such outlook is negative.
The Risk Off ETN provides investors with the ability to implement a comprehensive “risk off” trade through the purchase of a single, exchange-traded security, OFF. Due to its daily short (inverse) exposure to the Index, the Risk Off ETN provides investors with effective long exposure to "risk off" instruments and short exposure to "risk on" instruments. The Risk Off ETN’s value is expected to rise when the outlook on markets and the broader economy is negative and to decrease when such outlook is positive.
The component weightings of each index are shown in the table below. Basically, the ONN is long the Index while the OFF is short the Index. This makes the two securities to be inverse related. If the markets are expected to rise, you want to buy ONN. Inversely, if the markets are expected to decrease, then you want to buy OFF. Investors must keep in mind that “markets” is defined as the following sectors: energy, agriculture, metals, equities, currencies and domestic and foreign government bonds. The value-based target weightings for the long and short positions are 150% and 50%, respectively, and the Index is rebalanced quarterly to return the weightings to these target levels.
The trade strategy is simply to own/buy the ONN when investors are expecting to put risk-on such as moving from cash to stocks and to own the OFF when a scare or bad news entices investors to move from stocks and currencies to safer plays such as cash. For example, when the next bad news from Europe hits the markets, investors are likely to take risk off so you would want to own OFF at this time. Comparatively, as soon as Europe proposes a final plan to save defaulting countries, the risk on trade will be where you want to be.
click to enlarge