I've been holding some inverse equity index funds since the top in early June, and the bet is paying off. Why is this strategy so unpopular? Obviously the leveraged funds don't work properly as a long-term holding, but there are some good unleveraged ones like SH.
I have done the same. I think that many investors don't spend any time doing any research.
Many people would prefer to take their money to a broker and forget about it. The broker then throws it into funds where he makes the best commissions.
I know that short-on-equity is going to be unpopular with retail brokers, but it's also off-the-radar when you read current articles about bear market strategies, like the one you posted. That's what puzzles me.
Broad equity indexes are great because they reflect, to some degree, every economic factor. So it seems logical that they can be your friend in good times and bad, since you can play them both ways.
My hunch is that people are shying away from the counterparty risks inherent in the swaps and derivatives that make up an ETF like SH. But I also have a hunch that even the most bearish pundits fear the masses piling into a fund like that.
Well said. I think for the average retail investor it should be a hedge rather than a core holding.
These things are very volatile and having a good chunk of money in fixed income is smart.
Many retail investors might jump out during a bear market rally and get burned. I love them though. Its a great way to short on your thesis without having to cover.
Bear market rallies could spook a lot of retail investors to sell and get burned badly.
I have read a lot about the counter party risk on these things. Its very spread out among many banks.
The conclusion is even if we had a crash these would be paid off due to the diversification of the many institutions that hold these. UBS is one of the biggest players from what I understand in these investments.
I love all of the new ETF's that are now available. I am taking a good look at TWM..I think commercial real estate is next.
Operational risks aside, why should an unleveraged inverse index fund be any more volatile than its non-inverse counterpart? If SPY is an acceptable core holding in a bull market, why not SH in a bear market?
Thanks for the interesting bits about the counterparty risk picture in these inverse funds. Any links you have on that topic would be really appreciated.
As for funds like TWM with intraday targets that are multiples of the index movement, they're not for me. If you read the SAI or just do the math, you can see how volatility erodes their performance proportionally. A sideways-trending but volatile Nasdaq will cause TWM to move down fundamentally, before fund expenses. So these funds are great for playing a swing with some leverage, but don't get along with the longer-term random walk.
I think SH, DOG, and PSQ all deserve more popularity.
I couldn't find anything too enlightening on the Ticker forum, except what you already said.
GRZZX looks like a good lazy way to continuously short equity with no counterparty risk, although it's expensive and doesn't target any particular index.
8 comments:
I've been holding some inverse equity index funds since the top in early June, and the bet is paying off. Why is this strategy so unpopular? Obviously the leveraged funds don't work properly as a long-term holding, but there are some good unleveraged ones like SH.
Anon
I have done the same. I think that many investors don't spend any time doing any research.
Many people would prefer to take their money to a broker and forget about it. The broker then throws it into funds where he makes the best commissions.
Kinda sad isn't it?
Jeff,
I know that short-on-equity is going to be unpopular with retail brokers, but it's also off-the-radar when you read current articles about bear market strategies, like the one you posted. That's what puzzles me.
Broad equity indexes are great because they reflect, to some degree, every economic factor. So it seems logical that they can be your friend in good times and bad, since you can play them both ways.
My hunch is that people are shying away from the counterparty risks inherent in the swaps and derivatives that make up an ETF like SH. But I also have a hunch that even the most bearish pundits fear the masses piling into a fund like that.
anon
Well said. I think for the average retail investor it should be a hedge rather than a core holding.
These things are very volatile and having a good chunk of money in fixed income is smart.
Many retail investors might jump out during a bear market rally and get burned. I love them though. Its a great way to short on your thesis without having to cover.
Bear market rallies could spook a lot of retail investors to sell and get burned badly.
I have read a lot about the counter party risk on these things. Its very spread out among many banks.
The conclusion is even if we had a crash these would be paid off due to the diversification of the many institutions that hold these. UBS is one of the biggest players from what I understand in these investments.
I love all of the new ETF's that are now available. I am taking a good look at TWM..I think commercial real estate is next.
This will then take down the regional banks.
Jeff,
Operational risks aside, why should an unleveraged inverse index fund be any more volatile than its non-inverse counterpart? If SPY is an acceptable core holding in a bull market, why not SH in a bear market?
Thanks for the interesting bits about the counterparty risk picture in these inverse funds. Any links you have on that topic would be really appreciated.
As for funds like TWM with intraday targets that are multiples of the index movement, they're not for me. If you read the SAI or just do the math, you can see how volatility erodes their performance proportionally. A sideways-trending but volatile Nasdaq will cause TWM to move down fundamentally, before fund expenses. So these funds are great for playing a swing with some leverage, but don't get along with the longer-term random walk.
I think SH, DOG, and PSQ all deserve more popularity.
Oops, I thought TWM was tied to the Nasdaq. It's the Russell 2k of course.
anon...liking the DOG..missed that one...Thanks for the heads up.
I have been looking for a nice DOW short although its too late IMO to jump in now.
There will be better entry points.
In terms of counterparty risk head over to the ticker Forum my karl denninger...
There are lots of discussions regarding the inverse ETF's..
Jeff,
I couldn't find anything too enlightening on the Ticker forum, except what you already said.
GRZZX looks like a good lazy way to continuously short equity with no counterparty risk, although it's expensive and doesn't target any particular index.
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