Joe Eqcome

CEF vs. ETF Arbitrage in the Real Estate Sector

Scott F

There's an article in today's WSJ (12/15/08) regarding leveraged ETFs. It entitled, "Are ETFs Driving Late-Day Turns?
Leveraged Vehicles Seen Magnifying Other Bets; Last-Hour Volume"
Hopefully, this will help expand your knowledge base regarding leveraged ETFs.

Joe Eqcome

CEF vs. ETF Arbitrage in the Real Estate Sector

The most disappointing thing about this comment is that the person didn’t read the article or the conclusions carefully. The article suggests that a strategy of CEF and ETF arbitrage don’t make sense for all the reasons stated in the article. I actually put it in bold letters so it wouldn’t go undetected. For your benefit I’ll restate it again below:

“Due to the similarity of ETF portfolio holdings, there may be greater arbitrage potential among the real estate ETFs than between ETFs and CEFs. Clearly, given the relative trading volumes, ETFs are a superior trading tool to CEFs for real estate.”

Beyond that, the comments were factually inaccurate and off the mark. Let me deconstruct some of these comments.

1) “CEFs and ETFs and not comparable because of leverage.” There are many ETFs that employ leverage and they go by such names such as “ultra” “2x” and “double”. You can buy them either on the long or short side. In fact URE, a CEF that’s included in my study, is an ETF that employs leverage. So, this is a factually incorrect statement.

2) “CEFs should be heavily discounted given their poor performance and unresponsive management” Anyone who has followed CEFs recognizes that the best time to buy CEFs is when they’re at deep discounts, inexpensive and truly reviled. (You might be a good leading indicator for their recovery.) To dismiss them for that reason is like suggesting we should buy them when they’ve performed well and are at premium? History will demonstrate this is a flawed strategy.

3) “What’s the point of an article on arbitrage when you can not borrow the shares?” While you may be right that it’s difficult to short CEFs in term of volume, one certainly could go long a CEF and short an ETF.

I would hope that in the future that you read other peoples’ work more carefully and support your criticism with facts rather than conjecture and suppositions. The investment world is not a world that supports proof by assertion.

Joe Eqcome



On Dec 14 10:48 AM Scott F wrote:

> I don't know; this is pretty thin gruel. ETFs and CEFs are not highly
> comparable because of CEFs' extensive use of leverage and ludicrous
> management fees. CEfs should be heavily discounted, considering their
> poor performance and unresponsive management (have any of you listened
> to one of their conference calls?). When you factor in their suspension
> of dividend payments for not meeting asset requirements, you really
> wonder if the author has done his homework. Lastly, what is the point
> of an article on arbitrage when you cannot borrow the shares? This
> does seem like random thoughts with unreadable graphs versus any
> concerted thinking.