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Interesting but somewhat misleading article on ETF counterparty risks

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  • Interesting but somewhat misleading article on ETF counterparty risks

    There have been question earlier concerning counterparty risks to ETFs; to add to that is an interesting description on the mechanics on execution risk to the ETFs:

    http://www.thestreet.com/story/10454...-so-smart.html

    I call this article somewhat misleading because - while loss due to execution is perfectly understandable, it does not itself mean the mechanism is flawed.

    Certainly I do agree that the performance of SRS has been less than inspiring - on the other hand I have followed SKF, UYG, and BKX quite closely since Q1 2008 and have not seen untoward losses in the ETFs vs. the underlying.

    But then again, I have not been holding a double or larger X ETF for long periods nor should anyone IMO.

    The frictional costs associated with these types of endeavors is no different than the frictional costs associated with options. As with anything else - very long dated options tend to not provide much more leverage than the underlying security itself unless you go WAY out of the money.

    The ETFs also are affected by demand - one reason why SRS was overperforming its charter for a while and equally can underperform.

    Judge for yourself:

    http://finance.yahoo.com/charts?s=iy...urce=undefined

    http://finance.yahoo.com/charts?s=%5...urce=undefined

  • #2
    Re: Interesting but somewhat misleading article on ETF counterparty risks

    Originally posted by c1ue View Post
    Certainly I do agree that the performance of SRS has been less than inspiring - on the other hand I have followed SKF, UYG, and BKX quite closely since Q1 2008 and have not seen untoward losses in the ETFs vs. the underlying.

    But then again, I have not been holding a double or larger X ETF for long periods nor should anyone IMO.

    The frictional costs associated with these types of endeavors is no different than the frictional costs associated with options. As with anything else - very long dated options tend to not provide much more leverage than the underlying security itself unless you go WAY out of the money.

    The ETFs also are affected by demand - one reason why SRS was overperforming its charter for a while and equally can underperform.
    SRS, SKF and other double shorts have plummeted over the last several months. Is this due to the "frictional costs" that are often mentioned, or the government-induced rally, or both?

    Looking at the charts, there were some big spikes last November and December. Can we expect to see something like that again if the market drops this Fall as EJ said might happen?

    Do the frictional costs of double ETFs gradually reduce them to zero over time?

    I keep reading that double ETFs are only good for short-term trading, yet I made some profits during the last upward spikes by holding them for a few months. Unfortunately, I'm very underwater now :eek: (went in this Spring when Fred said, "we're going short"), and I'm wondering whether to bail out and take losses, or wait some months and hope for another spike upward.

    Any insight from those more experienced in this area would be apprecicated . . . .
    raja
    Boycott Big Banks Vote Out Incumbents

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    • #3
      Re: Interesting but somewhat misleading article on ETF counterparty risks

      Originally posted by raja View Post
      SRS, SKF and other double shorts have plummeted over the last several months. Is this due to the "frictional costs" that are often mentioned, or the government-induced rally, or both?

      Looking at the charts, there were some big spikes last November and December. Can we expect to see something like that again if the market drops this Fall as EJ said might happen?

      Do the frictional costs of double ETFs gradually reduce them to zero over time?

      I keep reading that double ETFs are only good for short-term trading, yet I made some profits during the last upward spikes by holding them for a few months. Unfortunately, I'm very underwater now :eek: (went in this Spring when Fred said, "we're going short"), and I'm wondering whether to bail out and take losses, or wait some months and hope for another spike upward.

      Any insight from those more experienced in this area would be apprecicated . . . .
      Figure it out, if the index on which the -200% ETF is based GAINS 50%. Twice that is 100% lost.

      I was holding some double short oil ETF, now out of business (and I suppress its symbol) which as WTIC went to >$140 last year, my ETF went to zero.
      Last edited by Jim Nickerson; 07-30-09, 12:16 AM. Reason: changes "loses" to "GAINS"
      Jim 69 y/o

      "...Texans...the lowest form of white man there is." Robert Duvall, as Al Sieber, in "Geronimo." (see "Location" for examples.)

      Dedicated to the idea that all people deserve a chance for a healthy productive life. B&M Gates Fdn.

      Good judgement comes from experience; experience comes from bad judgement. Unknown.

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      • #4
        Re: Interesting but somewhat misleading article on ETF counterparty risks

        Originally posted by Jim Nickerson View Post
        Figure it out, if the index on which the -200% ETF is based GAINS 50%. Twice that is 100% lost.

        I was holding some double short oil ETF, now out of business (and I suppress its symbol) which as WTIC went to >$140 last year, my ETF went to zero.
        Yikes :eek:

        Go to zero . . . .
        That would be an expensive lesson.


        SRS is at around 15 now.
        I guess I can only hope it won't go out of business before EJs "possible sharp downturn" in the stock market in the coming months . . . then maybe I can escape the steamroller.
        raja
        Boycott Big Banks Vote Out Incumbents

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