Preet Banerjee

Barclays' New ETN+ Notes: A Better Leveraged Exchange-Traded Product?

An excellent point AIP. The stop-loss mechanism triggers at $10/unit and the notes have initial denominations ranging from $50 to $100/unit. So the internal stop-loss might not be of much comfort. Investors may want to consider their own stop-loss orders.


On Dec 01 09:07 AM American in Paris wrote:

> You failed to mention the biggest problem: these ETNs are subject
> to margin calls.
>
> If there is no rebalancing of a leverage asset and its price falls
> enough, it's wiped out.
>
> These ETNs have a provision where if the price falls about 1/3rd,
> then the assets are sold, the lender paid, and the residual given
> to the shareholders.
>
> You can do better by buying a daily or montlhy rebalanced leveraged
> ETF (which has the advantage of no counter party risk a la Lehman
> Brothers) and rebalancing its periodically.
>
> None of these Barclays ETNs would have survived the fall of 2008.

Barclays' New ETN+ Notes: A Better Leveraged Exchange-Traded Product?

An excellent point AIP. The stop-loss mechanism triggers at $10/unit and the notes have initial denominations ranging from $50 to $100/unit. So the internal stop-loss might not be of much comfort. Investors may want to consider their own stop-loss orders.


On Dec 01 09:07 AM American in Paris wrote:

> You failed to mention the biggest problem: these ETNs are subject
> to margin calls.
>
> If there is no rebalancing of a leverage asset and its price falls
> enough, it's wiped out.
>
> These ETNs have a provision where if the price falls about 1/3rd,
> then the assets are sold, the lender paid, and the residual given
> to the shareholders.
>
> You can do better by buying a daily or montlhy rebalanced leveraged
> ETF (which has the advantage of no counter party risk a la Lehman
> Brothers) and rebalancing its periodically.
>
> None of these Barclays ETNs would have survived the fall of 2008.

Make Money in a Flat, Volatile Market by Short Selling Leveraged ETFs

Re: profits on short selling. Yes, I agree that the maximum you can make on a short is 100% when you have to put up capital, but I would put naked shorts at the higher than 100% (for the above example) and somewhere between the two if your requirements are not 1:1. If you don't put up any capital, then this changes the perspective - which is in part why so many hedge funds had so many problems - taking bets with other people's money / no money.

The cost (at least here in Canada with one of my discount brokers) for borrowing inventory is prime + 1.5% which equals 3.75%. Any my broker has inventory on leveraged ETFs that are short eligible. This is with Questrade (only operates in Canada I believe).

Make Money in a Flat, Volatile Market by Short Selling Leveraged ETFs

@Inflation - yes, this is the decay that is being referenced. I've used 3x ETFs and 2x ETFs in the same manner that you do, for very short runs into the markets, and only in my small trading account.


On May 22 03:06 PM inflation wrote:

> Preet - I assume this is what they refer to when they talk about
> the "decay" factor in the 2x and 3x etf's? I have seen decay mentioned
> many times on different blogs but was never exactly sure what it
> meant. I have been banging away on FAZ and FAS but never hold them
> for more than a day at a time. Usually just try to catch the trend
> of the day and get in and out quickly.

Make Money in a Flat, Volatile Market by Short Selling Leveraged ETFs

That is an excellent idea - I'll write about that in the future, thanks for the great idea! Much less risky, but the option market liquidity for these things would be a possible hurdle? Thoughts?


On May 22 11:53 AM juan77 wrote:

> Buying puts is probably a cheaper and less riskier way to play this.
>

Make Money in a Flat, Volatile Market by Short Selling Leveraged ETFs

@ D. MCHattie - I called my discount broker and they indicated that the list of shortable securities changes each day (based on their inventory I presume, and I imagine these lists are getting tighter).

So you could call them and ask if that security is ever short-eligible, and also factor this into your decision to engage in this kind of strategy.

I might try it out myself in a small dose just to see how it behaves, but I don't think I would ever devote any significant allocation to it myself.


On May 22 11:00 AM D. McHattie wrote:

> I like the idea and think your reasoning is sound. Can someone help
> me with the specifics of this?
>
> I use etrade and, to test how it's done, I just tried to short sell
> a relatively small number of AGA shares. I was rejected because
> "Short sales in this security are not allowed, as we were unable
> to borrow the shares."
>
> Do I need to work with another online brokerage? Does anyone know
> of one that will allow short selling of AGA or AGZ?

Make Money in a Flat, Volatile Market by Short Selling Leveraged ETFs

Think of it as a long position: if you bought something at $1 and sold it for $6 you would have a 500% gain. You could short something at $6 and buy to cover at $1.


On May 22 10:54 AM jgbooker wrote:

> How do you make 500% on a short sale?

Make Money in a Flat, Volatile Market by Short Selling Leveraged ETFs

The main point is that to win when holding a leveraged ETF requires you to be right on both direction and path - which is very hard to do. This analysis was a bit of a jab on leveraged ETFs, but the subtlety was perhaps a bit much? :)


On May 22 09:33 AM j1d2j3 wrote:

> this is true for any per-centage move; if %'s are equal, up and then
> down or the reverse ; the second move never numerically equals the
> first move. try it yourself , don't understand your point.

Make Money in a Flat, Volatile Market by Short Selling Leveraged ETFs

Appreciate your feedback. One of the great things about the internet is that there are sharp guys like yourself to further the conversations on strategies like this. As mentioned in a previous comment, I was really more thinking out loud, the the risks you identify are valid. I hope I didn't confuse anyone with the timing of the post to indicate that I am predicting a flat market (or making any predictions).

It's more akin to me saying "owning a broad market ETF works in an up market" without calling the market - I'm more of a passive investor for the bulk of my own portfolio.


On May 22 08:58 AM Luck-o-the-Irish wrote:

> This is true, but if you are short, and you are wrong, let's say
> you shorted FAS back in March, you could wind up with a loss of 100%
> or 200% in a rather quick fashion. Right now, we certainly have
> the volatility, but until the last week, we have only seen trends.
> The first went straight down in February, early March, then we saw
> the reverse in March-April, on the straight up path. If you had
> been too aggressive on either, and it was too large a percentage
> of your portfolio, you would have been wiped out. That does not
> invalid your point, but you fail to talk about ANY of the risks associated
> with this strategy at all.
> Secondly, you have to worry about the inventory issue. First, you
> have to find the shares to short. Then, and most importantly, you
> have to be able to HOLD your inventory. You completely fail to mention
> the buy in risk on these, and it is a major risk. You would not
> be a happy camper if you short one of these, the market moves against
> you, and then you are forced to buy at a higher price, and there
> is no inventory to short. You may very well have been right in your
> short, but you are given the time to wait it out, and instead forced
> to take a loss.
> I applaud you on the concept. It is a valid premise, but your failure
> to examine the risks is a pure shame.

Make Money in a Flat, Volatile Market by Short Selling Leveraged ETFs

@dumbo - I personally passively invest about 80% of my own portfolio, and I use up to 20% for my "trading account/gambling account". I say "trading/gambling" because I for the most part I don't try to predict the markets. This post was really just thinking out loud. I do not know of any volatility indicators that are forward looking, so the call for a flat market or volatility are just guesses in my opinion.