The other night a reader pasted an entire article from Morningstar about the new VIX ETNs (I think it was the whole thing anyway). I'm not sure if the article drew the correct conclusion or not but it struck me as far more balanced than what I have read previously from Morningstar about new types of products. The VIX ETNs are only about ten minutes old but they are different.
For years I have been writing about ETF innovation allowing investors to create more sophisticated portfolios. This is a fairly obvious observation but I have been making the point for a while and although progress has been made I wish the industry was a little further down the innovation trail.
I thought it might be interesting to put together a list of ETPs that I'd like most like to see. Some have already been filed for and some others I just think should be created. ETP stands for exchange trade product.
Working down the IndexUniverse list of filings the first thing that catches my attention is a Peru ETF from iShares (a company called Global X as also filed for a Peru fund). Peru is an interesting country that is worth learning about. It is obviously resource rich, has been a surplus country (that might change this year) but I still have some learning to do. There are a couple of stocks from Peru that trade here but an ETF would obviously create more choice and make it easier for people to buy who may not want to pick a stock but like the top down story.
EGA Emerging Global Shares is a company I have mentioned before. They have filed for emerging market sector funds which I think would be a big deal in terms of top down portfolio construction done at the sector level. One of the brains behind this company is one of my blogging friends, Richard Kang and about all I know is that the company exists, but I think these would be huge; specifically, telecom, financials, utilities, materials and maybe industrials. Tech would be tough unless that fund is all the contract manufacturers in SE Asia.
Back to Global X which in addition to Peru has also filed for an Egypt fund. I have long been intrigued by Egypt as an investment destination. There is some sort of trust that trades very thinly in London but if you learn the story you might think this one would come soon--that is if Global X is actually a company. Market Vectors also has an Egypt fund in the hopper and a Vietnam fund too.
IndexIQ has filed for some ETFs that try to create hedge fund strategies using ETFs (so funds of funds). Included in the proposed roster is a market neutral fund that will try to not be effected by what the overall market is doing. It will go long and short ETFs based on a strategy that is not clear to me from reading the prospectus. For now I am curious.
Macroshares has filed for a Medical Costs Up/Medical Costs Down combo. I must be missing something because this seems like a one way trade.
WisdomTree has one of the more interesting pipelines but they have been very slow to move the filings to fruition. I am not sure if it is a business conditions thing or something else but they have dividend weighted country funds and currency funds galore in their filings. Dividend weighted country funds would allow for a rotation to favor value in a country at certain points and then rotate back to a slightly growthier feel later or use their fund, which presumably would be less volatile than the iShares equivalent, as the core exposure for the country with a more volatile stock as the explore exposure.
As far as the currency filings I am most interested in the Singapore dollar, the Chilean Peso and the Israeli shekel. If the dollar is going to be as doomed as so many people think it would be nice to spread around some cash into different types of currencies.
Included in the list of ETPs I would like to see but that are not filed for include something that tracks the CBOE Put Write Index. Similar to the buy write index it's history has better returns over the entire cycle with less volatility. In a similar vein I'd like to see buy write versions of country indexes. Several of these already exist around the world, they tend to do the same thing versus the benchmark index as the US buy write index does against the S&P 500.
I think there is all sorts of room for fixed income products that focus on foreign markets. There are plenty of very specific indexes that already exist but I'd like to see funds for as many individual countries as they want to make or even regional funds or funds with countries that have like qualities.
There are many different themes I'd like to see like global ports/toll roads/airports. There are also more commodity ETFs I'd like to see (iPath ETNs cover a lot of ground but I am not crazy about the wrapper).
The big obstacle to these is investor demand which I realize would probably be quite low. How about you? Got any ideas? This site gets a little bit of readership from people in the industry maybe an idea you have can strike a cord with someone.
A-Rod testing positive for steroids in 2003? Not a black swan. The picture is from a hike in New Zealand.
22 comments:
I loved the country and sector strategy rotation funds, but apparently not too many other folks did. I'd like to see a five asset class etf that traded in/out at the 200 dma, ala Mebane Faber's paper.
And speaking of black swans, how about a family of etfs that are 90%treasuries and 10% various other things. Or the improved black swan port that you posted at greenfaucet.
Fun blog today, thanks.
Oops, make that at thestreet.com. Apologies.
You sometimes hear about the ratios of silver, gold and oil and how they usually revert to a mean. Apparently gold is expensive, compared with oil and silver, so a short/long (changing as the ratios change) EFT might attract interest here?
Well, at this point in time, you're talking mutual funds. Though the first managed ETFs are either on the way or already here - I can't remember.
Some interesting quotes from Larry's Swedroe's recent book.
"One of the rules of prudent investing is to avoid complex securities because the complexity is likely to favor the issuer."
"The overwhelming majority of individual investors aren't content to settle for market returns. Instead they try to outperform the market through various methods such as stock picking, market timing and fund selection. The unfortunate result for most investors has been below-benchmark returns."
"Some investment products are so complex in design that it is very difficult, if not impossible, for the average investor to fully understand the risks entailed and the cost incurred."
"It is important for investors to develop a disciplined strategy so that they are not reacting to the noise of the market and the emotions that noise can cause."
And the granddaddy quote
"One of the more common mistakes investors make is that they are fooled by randomness, confusing skill and luck."
YMMV
i tend to not like the funds that sector or country rotate in an attempt to be a better broad market proxy.
7:46, although I don't spend any time on that sort of thing (at least not now) i think is a big area but i'd rather build the trade myself long one precious metal versus shorting another or the AUD/NZD pair as another example.
YMMV, that is good stuff. i agree simple, where possible, is better but i also think that the manner in which we achieve the return our plan calls for is evolving and I do think it is important to keep up with this possibility.
Roger, have you had a chance to check out a new high yield municipal bond ETF, HYD which evidently just launched? Thank you.
Roger, what is the best way to hedge against inflation in a taxable account?
i've heard about it HYD, a lot of folks have covered but have not looked closely.
taxes are not more important to me than the consequences of inflation. if i client only has a taxable account then i use the same vehicles i use for everyone else and don't hesitate to put them in a taxable account. If a client has both accounts and a tax sensitivity i try to accommodate.
OK, taxes don't matter to you.
What would you suggest for protecting against inflation then, TIPS, commodities, stocks, short duration bonds?
Also, does it make a difference if someone is in the accumulation stage as opposed to withdrawal stage? If so, what tactic for each?
Or do you have a method for forecasting inflation? Like your yield curve indicator and 200 DMA.
I ask this, because all you hear about is the inflation that is coming down the pike if the stimulus package is passed. Since it is "conventional wisdom" perhaps that is a pretty good indicator that it won't happen and something completely unexpected will.
Sorry this is kind of off topic.
Almost everyone says "use TIPs" these days. Except for Harry Browne who says use gold - but he'd been saying that since long before TIPs even existed.
Looking through the list, it looks like ProShares has Short 10 yr and 20+ yr Treasury ETFs on file (not the Ultra Shorts which are already out). These would be of interest to me.
Seems like double and triple long/short ETFs get most of the attention (and volume?). Guess everybody's trying to shoot the lights out these days. But what about us more "conservative" folks who would be perfectly content with 1X inverse returns as a trade or hedge?
Much has been written about how these 2X and 3X funds have tracking issues over time due to volatility and so are better left to day traders. Is it safe to assume that plain vanilla 1X short funds would not have this problem (I realize there may be other risks based on the instruments they use etc.)?
Harry Browne had Lou Gehrig's Disease and died a couple years ago but he probably would have preferred gold to TIPS if only because the former is more volatile and captures the effect better (effect here being the erosion of cash's purchasing power, its ability to store value); he was also a major gold bug in the 70's of course but that was a smart thing to be then, at least until it wasn't (g).
Still, he was also a big fan of capital preservation so, given that TIPS are a US Treasury issue -- full faith and all that -- he probably would have included those in the mix too.
It certainly seems likely that inflation is eventually in the cards given how much money is being created but the most powerful forces now seem to be deflationary so it may be awhile before we see interest rates rise. I tend to prefer high-quality floaters over TIPS in that scenario but, right now, capital preservation rules the roost so the point is moot.
Hey RW,
I really like your posts and observations. I'm glad you regularly share them here.
RE: possible ETFs -
I'd particularly like to see non-financial, global sector preferreds ETF for income.
(A similar-feeling ETF is IDV, DJ Developed World Dividends, non-REITs.) IMO current preferred ETF products are so heavily bank-oriented they are scary, from a cap.preservation point of view.
I'd support your idea of income producers like toll roads, airports, as well as more currencies, etc.
Anna in NC
I have been reading your blog for some time now and find it informative and helpful. You and your contributors have helped to expand my investing knowledge. I am retired and have been managing my own accounts. Reader 6:43AM posted a question re a large investment in bonds with a flier in equities as suggested by Taleb. I was playing with that idea and constructed a theoretical portfolio consisting of 70% in four bond mutual funds and 30% in an agressively managed equity mutual fund. The bond funds are VBIIX, VFIIX, HABDX, VIPSX. HABDX is a proxy for PTTRX(B.Gross). The equity fund is CGMFX (K Heebner). The theoretical funding was $1,000,000) with 70% invested in equal amounts to the 4 bond funds, and 30% in CGMFX. I used the total return figures for each fund as published in MSN.com. I wanted results for the past 10 years beginning in 1999 and ending in 2008. VIPSX was not available until 2001, therefore I split the 700,000 equally between the remaining bond funds for 1999 and 2000. The total returns for each year are as follows:
1999 2.6%
2000 24.5%
2001 20.25%
2002 3.02%
2003 23.7%
2004 7.76%
2005 9.39%
2006 6.66%
2007 30.01%
2008 (-13.3%)
The annualized average return of this portfolio over the ten years was 10.79%. The return of the S&P index(VFINX) was (-1.47%). There aws only one down year, 2008. I went on to Index Fund Advisors (IFA.com) to see which allocation over the 10 year period gave the best return. They use DFA funds and the ioo% allocation divided 65% US equities, and 35% foreign gave the highest results, 5.59% as compared to 10.78%. The DFA fund allocations were sliced and diced in various sub categories. I would not know how to determine the SD for this portfolio, but it appears to be less risky. I hope to view some comments on this post. Thanks again. Retired in PA.
great stuff Retired in PA, thank you for posting it. to the extent you care, there are sites that will figure standard deviation. PortfolioScience.com is one I know of.
I've been playing with some similar ideas after seeing the 90/10 portfolio idea mentioned here several times. Not so much putting 90% in bonds as putting some small percentage in a high risk/high reward fund, or maybe making the portfolio more conservative - but having the bet on something like CGM Focus. Of course, there's always the problem of the manager having a bad run or leaving.
What makes CGM Focus lately, of course, is that one year of 80% return.
My calcs show that for the last 5 years, the suggested portfolio with CGM Focus returns 7.49% annualized, while the portfolio with VAnguard's Emerging Markets fund instead of CGM Focus gives you a 7.07% annualized. Not bad.
What would be nice to have for playing around with is historical returns for powershares PZH emerging markets ETF.
Of course, it'd be nice if my 401k had more bond choices too blah blah blah. heh.
The past is no predictor of the future. Study reversion to the mean.
Thank you for your comments. I am aware that the past is no proven predictor of the future but it is informative. There were two observations that I would like to make from my previous post: CGMFX was down 48.2% in 2008 and the portfolio was down 13.3%. Not a bad performance considering the market performance in 2008. The IFA 100% equity fund as I mentioned in my post had an annualized return of 5.59% over the ten year period of 1999-2008. The bond funds in this portfolio, VBIIX, And HABDX both beat the high risk high reward DFA all stock portfolio; DFA 100% equity=5.59%; VBIIX=5.81%; HABDX=5.93%. Thanks again for the dialogue. Retired in PA
Will these ETN's be a good hedge for a stock/bond portfolio and offer similar results as an something like a managed futures fund or absolute return fund?
VIX-Based ETNs Begin Trading
The much-anticipated exchange-traded notes that are designed to provide exposure to the CBOE Volatility Index, or the VIX, officially launched last Friday.
The new ETNs are the first of their kind on the market. They are the: iPath S&P 500 VIX Short-Term Futures ETN (NYSE Arca: VXX) and the iPath S&P 500 VIX Mid-Term Futures ETN (NYSE Arca: VXZ). Both come with an expense ratio of 0.89%.
However, these products do not directly track the well-known VIX index, but rather indexes calculated by Standard & Poor’s that track futures contracts on the VIX. Essentially, the ETNs are tied to indexes that track futures contracts on an index that tracks futures contracts on an index (the S&P 500).
A bit mind-boggling, to say the least. But the clamor for an exchange-traded product tied to the VIX has only grown with the market’s steadily increasing volatility. The VIX traditionally has a virtually inverse correlation with the broad market, and it was one of the few indicators that actually trended upward in 2009. Considering it is also sometimes referred to as the “fear index,” that’s more than a little disturbing.
VXZ’s underlying index tracks a daily rolling long position in the fourth-, fifth-, sixth- and seventh-month VIX futures contracts. Meanwhile, VXX’s underlying index tracks a daily rolling long position in the first- and second-month VIX futures contracts.
You can read the prospectus on the ETNs here.
global x does exist (www.globalxfunds.com), colombia etf trading on nyse arca under ticker gxg
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