Friday July 10, 2009

Why do I continue to hold the majority of my ultra short ETFs? Because they are no longer acting like basket cases. In fact, most of them are forming beautiful looking bottoms and the charty geek in me cannot resist bottoms like this, especially when they are doing a good job of protecting my bullish positions in some of the smaller gold stocks.

Here is SRS, the ultra short real estate ETF acting nicely inverse to the IYR chart shown yesterday and trying to confirm a breakout.

When ETF issuer Direxion launched its Financial Bull 3X Shares (FAS) and Financial Bear 3X Shares (FAZ) in November of 2008, market volatility was skyrocketing, providing an attentive audience of nervous investors anxious to pick sides in an uncertain environment. Eight months later, bullish FAS has dropped more than 60% while bearish FAZ has plummeted 96% as the funds’ methodology has mercilessly taken its toll on both share prices. The Direxion pair has intensified an existing debate on the role of leveraged funds, which have experienced booming popularity as investors use ETFs to make previously inaccessible bets. The trend toward leverage has not gone unnoticed, however, and as leveraged funds are pushed into the spotlight, it is more important than ever for investors to understand what they’re getting.

Investors may be perplexed as to how both a bull strategy (FAS) and a bear strategy (FAZ) can be leveled simultaneously. The reason, while potentially controversial, is not a mystery to investors with the initiative to look: the disclaimer is front and center on Direxion’s home webpage. “Direxion Shares ETFs seek daily investment goals and should be used strictly as short term trading vehicles,” the website warns, highlighting the daily reset strategy of the fund. As the value of the fund vacillates, the daily impact is compounded, sinking both funds over time.

Although ETFs and mutual funds seem in many ways to be natural rivals, one of the most closely-watched trends in the “active vs. passive” debate has been the development of a hybrid type of investment option: actively-managed ETFs. While the space has mostly taken “baby steps” to this point, it appears to be poised for explosive growth in the coming months.

Pioneering PowerShares

Bear Stearns actually launched the first actively-managed ETF in March 2008, but the issuance was overshadowed by the brokerage house’s impending demise, and the fund (YYY)) shut down less than six months later. Invesco PowerShares is the true pioneer of the actively-managed ETF space, launching four ETFs (PQY, PQZ, PMA, and PLK) in April 2008. Based on proprietary quantitative methodologies, these ETFs were the first to deviate from a predetermined, static index. Originally, the four PowerShares ETFs imposed limitations on the timing and frequency of trading, although such restrictions have since been relaxed. PowerShares subsequently introduced an actively-managed real estate ETF (PSR).

By Patrick Watson

Effective Thursday morning two of the DirexionShares ETFs began trading with a reverse split. Daily Financial Bull 3X Shares (FAS) split at 1-for-5 while Daily Financial Bear 3X Shares (FAZ) had a 1-for-10 split. For every five shares of FAS you owned as of Wednesday’s close, you now have just one share which is worth five times as much. Likewise for FAZ, except the ratio is 1:10.

By Brandon Clay

After the stunning rally in March, many market experts think the summer doldrums have set in and stocks may languish for the next couple of months. Second-quarter earnings may not be much help while charts for the Dow Jones Industrial Average and the S&P 500 are showing the infamous head-and-shoulders pattern. This is normally a sign that a pullback is in the offing.

Though they are less than two weeks old, the two new triple ETFs based on the S&P 500 index already have options available to trade. The bullish 3x ETF, Ultra ProShares (UPRO) has July options that expire one week from Friday with strikes from 60 to 95, including single dollar increments from 80 through 90. The bearish -3x Short ProShares (SPXU) has options available from 70 to 95, with all the strikes in single dollar increments.

In anticipation of a broad range of applications and the potential for some significant movement, the strikes for the December options range all the way from 30 to 140 for UPRO and from 40 to 150 for SPXU.

As of last Tuesday there is a way to trade houses just like you would stocks – sort of. A company called MacroMarkets has created two instruments that allow people to take positions that bet on the price of houses going up or down in 10 markets that comprise the Case Shiller 10 City Composite Index. The motivation for creating these instruments (aside from MacroMarkets collecting fees) was to permit homeowners to hedge their exposure to housing prices.

These instruments are similar to ETFs in that they trade on the exchanges and their value is (loosely) tied to an index value, that being the 10 City Composite Index. The way MacroMarkets created these instruments is that they deposited money into two trusts – one of which represents an interest in the underlying index going up and the other representing an interest in the underlying index going down.

So, it shouldn’t be surprising to see the first U.S.-listed ETF focused on Muslim principles. The real question is what took so long? The provider, Javelin Exchange Traded Funds, a brand-new independent ETF firm, started building the firm from scratch about 18 months ago. It’s nice to see amid the ETF industry’s consolidation new firms entering the market.

Direxion will execute a reverse split of its leveraged and inverse financial ETFs on July 9th, after the two funds’ share prices fell so much that they became overly costly for investors to trade.

The Direxion Daily Financial Bull 3X Shares (NYSE: FAS) will execute a 1-for-5 reverse split, meaning shareholders will receive 1 share of the new FAS for every 5 shares they own today. For the Direxion Daily Financial Bear 3X Shares (NYSE: FAZ), the ratio will be 1-for-10.

You can now gain leveraged and inverse-leveraged exposure to US stocks without having to choose a subset of large-cap, mid-cap or small-cap stocks.

Two new ETFs from ProShares started trading today, providing +200% and -200% exposure to the Russell 3000 Index. ProShares Ultra Russell3000 (UWC) and ProShares UltraShort Russell3000 (TWQ) will seek to provide daily returns that are +/- 200% of the index. The Russell 3000 Index represents approximately 98% of the investable US equity market, making these new funds the closest thing to “total US market” leveraged ETFs.

By Patrick Watson

Back in April we reported on FaithShares, a planned line of new ETFs aimed at various Christian denominations. Yesterday the pool of monotheist-oriented ETFs expanded with the launch of Javelin Dow Jones Islamic Market International Index Fund (JVS) on the NYSE. More funds are planned from this new ETF family that calls itself JETS - Javelin Exchange Traded Shares.

Two odd press releases after the close yesterday, both pertaining to our favorite REIT focused fund. According to the first, Cohen & Steers Advantage Income Realty Fund, Inc. (RLF), Cohen & Steers Worldwide Realty Income Fund, Inc. (RWF), Cohen and Steers Premium Income Realty Fund, Inc. (RPF) and Cohen & Steers Quality Income Realty Fund, Inc. (RQI) have all merged with and into RQI. It apears that even despite the magical ramp of all REITs this quarter, those pesky "size matters" issues have reared their ugly heads for the 4 various closed-end funds (all four combined represent less than half a billion in net assets):

In approving the mergers, the directors considered, among other things, each fund's investment objectives, net asset value and stock price performance, income-generating strategy and expenses, and potential cost savings based on operational efficiencies. The mergers will permit fund shareholders to pursue substantially similar investment objectives in a larger fund that has similar investment policies and anticipated lower expenses.

For someone who gets a kick out of volatility, the arrival of triple ETFs has been a little bit like manna from heaven. Of course the launch of the Direxion triple ETFs back in early November just happened to coincide with the highest VIX readings in history. There is nothing like record volatility, except perhaps record volatility times three.

But a lot has changed since November. The VIX traded in the 80s the month it was launched; today it was as low as 25.02. At the moment the VIX is exactly 1/3 as high as it was when it peaked in November at 81.38. For those who have been selling options, the ride down the volatility slide has been an unusually profitable one. In fact, it is likely that some of the premiums harvested in the last nine months or so will turn out to be the most bloated we will see in our trading lifetimes.

By Matthew Hougan

Investors expect the average price of a home in the U.S. in August 2014 to be virtually identical to where prices are today.

Two funds, MacroShares Major Metro Housing Up (UMM) and MacroShares Major Metro Housing Down (DMM) began trading today. Do not buy these products until you have read and understand the prospectus, especially the parts where it explains that they will not track the underlying Case-Shiller index.

Would you buy a stock whose chart looks like the one below? It had a nice run but has pulled back quite a bit over the last couple of years.

click to enlarge

ProShares stepped up their leveraged ETF game last week with the introduction of their first pair of 3x ETFs. Many analysts covered this story. However, a significant part of the story was mostly overlooked - ProShares also stepped up the “disclosure” game.

Many have criticized the industry for not adequately warning investors about the negative effect of holding leveraged ETFs for more than short periods of time. Some have gone so far as saying that leveraged ETFs should be banned. I believe education is a better solution, and last April I wrote an article showing a real life example of the 3x impact.

It's been a tough year for value stocks. Is that surprising? No, although it reminds that Mr. Market prices certain slices of the equity market differently throughout the business cycle.

For the year through June 26, the rebound in equities has been powered mostly by growth stocks, according to Russell indices. As the chart below relates, growth stocks in general have been the conspicuous leaders through the first half of 2009.