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Tristan Yates

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  • Defending Financial Journalists - and Bloggers [View article]
    You can't expect financial journalists to accurately predict next year's S&P 500 level. However, they should be able to detect fraud.
    Mar 6, 2009. 02:31 PM | 2 Likes Like |Link to Comment
  • In Defense of Leveraged ETFs [View article]
    I wrote the initial article: "The Case Against Leveraged ETFs". Since then I've done more writing and analysis, and the latest is here:

    I also contributed to some of the recent Larry McDonald articles which are very good.

    The take aways:
    1) the cumulative product of doubled daily returns will almost certainly be lower than the underlying returns because its harder to recover from a doubled loss than the loss itself.
    2) you have to pay very close attention to your index exposure because it can very quickly get out of control, making your risk exposure rise and fall dramatically
    3) they have a *monster* cost of capital & expenses built in that's simply indefensible - like 7% a year.

    Bottom line: Leveraged ETFs are for amateurs. If you want leverage, use options or futures or even margin (with a decent broker) like a professional.
    Jan 26, 2009. 01:00 PM | 2 Likes Like |Link to Comment
  • Are Index Funds the Only Rational Choice? [View article]
    Good article. The S&P 500 is a decent benchmark but is considerably antiquated as an investment portfolio. The outperformance of small cap and value stocks has been known for 40 years and the effect of momentum was studied extensively in the 80s and could be considered another factor. There is also a liquidity premium (low liquidity investments have higher returns) and very likely a volatility premium. (This is distinct from the implied/historic volatility premium that exists in the options market.)

    I recommend reading Fama & French's 2007 paper "migration" and his related 2008 paper that investigates the source of the value and size premiums.

    Tristan Yates
    Author: Enhanced Indexing Strategies
    Dec 16, 2008. 02:54 PM | 1 Like Like |Link to Comment
  • Leveraged ETF Debate Hits the Mainstream [View article]
    Not enough money in leveraged ETFs to move the market, especially considering the daily rebalancing effect is only a fraction of the value of the fund.
    Dec 16, 2008. 02:46 PM | 1 Like Like |Link to Comment
  • Fed's Folly: Fooled by Flawed Futures? [View article]
    When over $1T of S&P 500 wealth is wiped out in two weeks and another $1T is on the way given the overseas losses and the futures, that's an economic reality you can't ignore. The Fed has a mandate to provide stability to the system, and the way it was going on tuesday, trading probably would have been halted multiple times that day. BB didn't know about SocGen, and regardless, I don't think a single market participant could have triggered the panic we saw.
    Jan 25, 2008. 01:37 PM | 1 Like Like |Link to Comment
  • Will it Take a Liquidity Crisis for Intel to Rationalize Capital Spending? [View article]
    Intel's huge profits and cash hoard is only possible because they've continued to maintain technical leadership. It's a strategic imperative for the company. There's just no scenario in which they have profits but no CapX.
    Jun 1, 2007. 08:48 PM | 1 Like Like |Link to Comment
  • The Case Against Leveraged ETFs [View article]
    Thanks for the comment and questions. This is exactly why I publish.

    msangelbates: It sounds like an interesting trading strategy, though I'm skeptical on the predictive power of SMA lines. The article is aimed more at people who are considering holding these at long term investments, as for example, Bill Donahue from the Street has suggested. Email me and we can talk more in-depth - I'm writing another article on momentum vs mean reversion and have some papers you may be interested in.

    But as a trader, you likely have access to better index-linked products anyway, like index and ETF futures and options, which is what I personally use. In a low-volatility market I can leverage the index 5x+ times with a capped 20% downside risk using an in-the-money LEAP call. Why even consider a leveraged ETF then?

    david: I used Yahoo adjusted-close prices, which include the effects of dividends. I think SSO keeps the dividends and uses them to pay interest costs, and that adds to the lag.

    qftz: You may not be using dividend adjusted prices. On close 6/21, adjusted for dividends, SPY was 123.97 and SSO was 68.32. At yesterday's close, SPY was 152.42 and SSO was 97.67. Gain for SPY is +22.9%, SSO is +43.0%. See the 6.1% lag in the nine month period? (43.0 / (2 x 22.9)). If our fund really doubled the return, we would have expected to make +45.8%.

    Note that this math differs from the article because we have some additional days, and I did the straight gain here rather than taking the individual daily SPY prices, doubling them, and comparing them to SSO.
    May 23, 2007. 01:05 PM | 1 Like Like |Link to Comment
  • The Case Against Leveraged ETFs [View article]
    I'll expand on the example. Today the closing futures price for the S&P 500 for June is 1518.80. But today's closing S&P price is 1512.75. The difference is 0.4%. In other words, the S&P 500 has to go up 0.4% by June closing, about 30 days away, just so you can break even. That's "how they get you", or in financial terms, how they build the cost of capital into the investment.

    Let's say you have $100k to invest and you want to create a 2X S&P 500 index fund. You buy index futures on $200k worth of the index. Every month, you settle and buy more futures. A year later, the index has gone up 10%. Your gains are 20%, or $20,000 right? Not quite. The futures cost you 0.4% x 2 x $100,000 per month, or 4.8% of $200,000 = $9600 for the year. You end up with only $10,400 in gains.

    But, because it only takes 5% margin to own a future, you were able to keep $90,000 worth of cash in your account all year earning interest. Invested at 5%, you get an extra $4,500. So your gains are $14,900, or about 15% of your investment. Which is what we'd expect given basic leverage formulas: $2 x 10% - $1 x 5% = 15%.

    This is what I mean when I say money costs money. An interest rate is built into any financial derivative you buy, and any leveraged investor has to exceed that cost of capital before they start making money.
    May 18, 2007. 02:33 AM | 1 Like Like |Link to Comment
  • Leveraged ETF Performance YTD [View article]
    Why write the same comment in three different threads?
    Mar 19, 2009. 12:31 AM | Likes Like |Link to Comment
  • Volcker's Capital Idea: Getting Back to Real Banking [View article]
    Is the old Volcker back? And will Obama let him fix the system?
    Mar 11, 2009. 12:43 AM | Likes Like |Link to Comment
  • As Unemployment Grows, Tech Jobs Hang On [View article]
    This recession is hitting lower-skilled workers primarily. The unemployment rate for college grads is 4.1%.
    Mar 9, 2009. 12:05 AM | Likes Like |Link to Comment
  • In Defense of Leveraged ETFs [View article]
    Mark, I hope you don't mind the debate. As a writer I get lots of positive and negative feedback on my articles and always enjoy it because it means my ideas are out there. I probably helped inspired your article and I'm happy to have done so. Good luck with your research and writing.
    Jan 28, 2009. 02:03 PM | Likes Like |Link to Comment
  • In Defense of Leveraged ETFs [View article]
    Quick quiz:
    1) If the S&P 500 falls 15%, what percentage increase do you need to recover your losses?
    2) Now calculate the same for a double and triple leveraged ETF.
    3) If you trade $20,000 of SSO every day and it has a built in 7% expense ratio, calculate how much you would save over a year if you switched to index futures with their built in broker margin rate of under 2%.
    Jan 26, 2009. 09:35 PM | Likes Like |Link to Comment
  • Understanding Levered ETFs and Geometric Returns [View article]
    Leveraged ETFs have a monster cost of capital built in that you can calculate by doubling the SPY return and subtracting the SSO return - it's about 7.1%. FYI I'm writing an article for Trading Markets on their 2008 performance and what investors can learn from it in terms of managing portfolios.
    Jan 4, 2009. 08:17 PM | Likes Like |Link to Comment
  • Direxion's Andy O'Rourke Talks Triple Leverage [View article]
    It will ultimately underperform the market, just like SSO.
    Dec 16, 2008. 05:40 PM | Likes Like |Link to Comment