ETFs - exchange traded funds

[blindboy]

from canaccord:

Exchange Traded Funds
BUYER (oops, I mean Seller) beware.

The Investment Industry Regulatory Organization of Canada (IIROC) recently put out a notice to investment dealers highlighting some risks and issues surrounding so-called inverse and levered ETFs.

With the growing popularity of these types of funds, IIROC highlighted that while such products may be useful in some sophisticated trading strategies, they are highly complex financial instruments that are typically designed to achieve their stated objectives on a daily basis.

Due to the effects of compounding, their performance over longer periods of time can differ significantly from their stated daily objective.

Therefore, leveraged and inverse ETFs that are reset daily typically are “unsuitable for retail investors who plan to hold them for longer than one trading session, particularly in volatile markets.”

So IIROC is reminding Dealer Members of sales practice obligations that recommendations to customers must be suitable and based on a full understanding of the terms and features of the product recommended and that sales materials related to leveraged and inverse ETFs must be fair and accurate.

Our compounding example to highlight how single-day levered gets distorted over longer time periods: Index increases from 10.00 to 11.00 (or 10%), and then declines by 10% to 9.90. The 2x levered ETF would go from a baseline of 10.00 to 12.00 (up 20%), and then decline 20% to 9.60, or underperform the benchmark by about 3% over two days. Over a longer period of time, this divergence can become magnified.



Exchange Traded Funds
If two is a date and three is a crowd, what’s eight? Eight new ETFs were added to the TSX yesterday.

BetaPro Management, a subsidiary of Jovian Capital (JOV) introduced six new commodity ETFs, including two double-levered ETFs, while iShares introduced the other two.

The two new double-levered ETFs from BetaPro are the HBP COMEX Silver Bull ETF (HBU) and Silver Bear ETF (HBD).

They are designed to provide daily investment results that correspond to two times (200%), or two times (200%) the inverse (opposite) daily performance of the COMEX silver futures contract for the next delivery month.

The single ETFs by BetaPro include the HBP COMEX Silver ETF (HUZ) and Gold ETF (HUG), which will use the COMEX silver futures contract for the next delivery month and the COMEX gold futures contract for the next delivery month, respectively, as the underlying index, as well as the HBP NYMEX Crude Oil ETF (HUC) and Natural Gas ETF (HUN) which will use the NYMEX light sweet crude oil futures contract for the next December delivery month and the NYMEX natural gas futures contract for the next January delivery month, respectively, as the underlying index.

The iShares CDN MSCI World Index Fund (XWD) will aim to track the performance of the MSCI World Index and has a majority of its weighting in the United States, as well as Japan and Britain and is diversified across a number of sectors.

The iShares MSCI Emerging Markets Index Fund (XEM) will try to replicate the performance of the MSCI Emerging Markets Index and will be heavily weighted in China, Brazil, and Korea as well in the financial, energy, and materials sector.

[blindboy]

from canaccord:

Exchange Traded Funds
“You’ve got to roll with the punches to get to what’s real.” – van Halen. Monday morning, Direxion Shares announced
reverse share splits of two of its leveraged ETFs: The Direxion Daily Financial 3x Bear (FAZ) fund will split 1-for-10, and
the Direxion Daily Financial 3x Bull (FAS) fund will split 1-for-5. For traders who have been using the leveraged funds a
scalping vehicles, Briefing.com thinks this is an excellent turn of events. Higher share prices mean lower commission costs fo
accounts where commissions are levied on a per-share basis. And, in liquid markets, higher prices reduce the percentage impac
of the spread, which allows for market order scalping. Hopefully, these types of moves will set the industry standard as far as
strategy for dealing with the time decay of leveraged ETFs, Briefing argues. “Time decay”, in this instance, refers to th
tendency of these instruments to decline in price over time given flat market conditions. This is because of the math involved in
the daily reset of percentage changes.

As a fictitious example, consider index XYZ and 2x leveraged long and short funds, XXX and YYY, respectively, based off of
XYZ. Assume all three begin at $10/share. On the first day, XYZ goes to $11 (increases by 10%). Consequently, XXX goes to
$12 (+20%), and YYY goes to $8 (-20%). On the second day, XYZ trades back down to $10 (-9.1%). As a result, XXX moves
to $9.82 (-18.2%), while YYY moves to $9.46 (+18.2%).

In other words, XYZ went from $10 to $10 in two sessions, and both of its related leveraged funds, bull and bear,
declined over the same period.

As Briefing notes, you can extrapolate this out and see that, over time, leveraged ETFs will probably need some mechanism of
regular price resetting, like a reverse split. The alternative would be to close them and reissue new funds (reset to $100/share or
something) when the old funds move under $10/share. Direxion’s move to reverse split the FAS and FAZ funds may be a sign
of where the industry is headed. Confirmation of that trend might be given by Proshares coming out and taking similar action
with Proshares Ultra Financial (UYG), their 2x financial sector bull fund which is now trading at around $3.50 per share.

[blindboy]

from canaccord:

Exchange-Traded Funds

Congratulations, you just discovered a whole new ETF risk.

On Tuesday evening, the U.S. Natural Gas Fund (UNG), a natural gas commodity ETF (which invests in natural gas futures) announced that it had stopped issuing new shares, a key function allowing ETFs to trade in line with their underlying asset.

Typically, ETFs can create new fund shares whenever investor demand arises, but the natural gas ETF's special legal structure limits its ability to do this.

The fund's managers filed with the Securities and Exchange Commission in early June to increase the number of shares it kept in reserve. The SEC has yet to approve the request.

So we believe that the ETF now has a unique structure in that its shares are structurally capable of trading above NAV, but not below NAV.

We understand that if sellers outnumber buyers, the funds market makers could repurchase its own shares, a common ETF stabilization mechanism to keep the unit price from falling below the NAV, but the ETF could not issue new shares to keep the unit price from rising substantially beyond the NAV.