Credit Risk and Exchange Traded Notes

In their fifteen year history, which includes the 2008/2009 financial meltdown, a grand total of three Exchange Traded Notes (ETNs) have gone bust due to credit default—all 3 were issued by Lehmann Brothers.  The total loss to investors was less than $15 million.  This article on ETF.com gives the detailed story. How many public companies have gone bankrupt, rendering their stock worthless, in the last …

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How do Leveraged ETFs Work?

At one point I was hazy about the internal workings of leveraged and inverse ETFs, so I constructed models of hypothetical 2X and -1X Apple ETFs to clarify my understanding.  I ignored a whole host of issues (e.g., regulatory, cost-effective leverage), but even a simple model of a leveraged ETF can hurt your brain.  The basic inverse and leverage mechanisms shown below are essentially the same for …

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A Volatility Spike Barclays’ XVZ Would Have Missed

February 27, 2007, currently holds the biggest daily percentage jump record in the VIX index’s history (the VIX didn’t come out until after the 1987 crash).  The VIX jumped from a 11.15 close the previous day to 18.31 —a 59% jump. Normally I would expect a volatility strategy fund like XVZ or, VQTto perform very well during a volatility spike of this magnitude.  None of these …

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Trading ETFs Without Getting Fleeced

There are over 1600 ETFs right now, with more in registration. This explosion of alternatives is great for driving down fees and giving investors choices.  However once we figure out what we want to buy, we often discover the fund we chose is lightly traded—perhaps only hundreds of shares are traded on any given day. With a lightly traded fund the bid/ask spread is usually …

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The Beginning of the End for Mutual Funds

The vibe of the IndexUniverse’s InsideETFs Conference in Hollywood Florida I attended in 2012 was one that I have felt before—a group that knows they’re changing the very structure of their industry.  It’s not just about being new, creative, or disruptive—it’s the sense of knowing you have won. The mutual fund industry is still almost 10 times the size of ETFs/ETNs with $7.9 trillion in assets vs …

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