Why a Physical Copper ETF Might be a Really Big Deal
(Dec 2012)
JP Morgan recently obtained approval by the SEC to launch a new copper ETF that, instead of holding derivatives linked to copper, will actually accumulate physical copper itself. While this may not seem like a thrilling market development, there are serious concerns that if this ETF becomes popular and garners significant assets, the world market for copper might be upended. Here's why:
Think of demand for copper as having two components: demand for industrial or productive uses and demand as...
Leveraged Exposure to the Mortgage REIT Sector
(Oct 2012)
Michael Aneiro over at Barron's pointed out an interesting recent SEC 424(b)2 filing from ETRACS for their Monthly Pay 2x Leveraged Mortgage REIT ETN (MORL). According to the prospectus, the ETNs will "provide a monthly compounded two times leveraged long exposure to the performance of the [Market Vectors Global Mortgage REITs Index], reduced by the Accrued Fees." This ETN is essentially a leveraged version of Market Vectors Mortgage REIT ETF (MORT) which tracks the same underlying index.
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Mutual Funds Holding Leveraged and Inverse Leveraged ETFs
(Oct 2012)
While looking through recent SEC filings, an updated prospectus happened to catch our eye. The prospectus offers updated information concerning the investment strategy and details of two mutual funds: USFS Funds Limited Duration Government Fund (USLDX) and USFS Funds Tactical Asset Allocation Fund (USFSX).
The fund management company -- Pennant Management, Inc. -- states in this prospectus that "[USFSX] may invest up to 33% of its assets in leveraged ETFs and inverse ETFs, up to 10% of its...
Another ETN Halts New Share Redemptions, Creates Premium
(Jul 2012)
In March we reported on TVIX, the leveraged volatility-linked exchange-traded note (ETN) which started trading at a very large premium to indicative value after its issuer halted the creation of new shares. Bloomberg's Matt Robinson is reporting that AMJ, a JPMorgan ETN linked to oil partnerships, has also limited new share creations and is developing a similar premium.
JPMorgan limited new share creations on June 14, and the premium to indicative value (the value of the underlying index) has...
Rehypothecation or Filched Fund?
(Apr 2012)
The investigation of the MF Global scandal is still ongoing. A lot of details concerning the missing customer funds haven't been revealed. At this stage there is no definitive answer as to whether MF Global blatantly transferred segregated customer funds to cover its own liquidity shortfall, or it merely used the often frowned-upon, but completely allowable practice of rehypothecation. In this blog post, I explain what rehypothecation is, as well as the controversy around it.
Rehypothecation...
Is There No Tracking Error for ETNs?
(Apr 2012)
Some investors may think that while ETFs are subject to various tracking errors, ETNs are not. The argument goes that index-tracking ETFs often hold part or the entire portfolio underlying their targeted index and are thus subject to imperfect tracking and transaction costs. ETNs, on the other hand, are debt instruments, and have returns guaranteed by their issuers.
It turns out, however, that the daily return of an ETN investment may not necessarily equal the leverage ratio times the daily...
Hedge Fund Correlation with Broad-Based Indexes Increases Dramatically
(Mar 2012)
As Bank of America-Merrill Lynch Global Research's Mary Ann Bartels showed last year, the correlation of hedge fund monthly returns with broad based stock market indexes has recently hit historic highs. We decided to look into this phenomenon and determine whether or not it is persisting.
In the following plot, we show the monthly returns for the S&P 500 index as well as the Dow Jones Credit Suisse Core Hedge Fund Index (representing an aggregation of several hedge fund investment...
Did ARS Interest Payments Adequately Compensate Investors After the Failures?
(Feb 2012)
Auction Rate Securities (ARS) are floating interest rate debt issued primarily by municipalities, mutual funds, and special purpose trusts. ARS were marketed as short-term, cash-equivalent investments similar to commercial paper but any similarities with short-term investments were superficial and misleading. ARS are long-term debt traded in periodic auctions with prices fixed at par. The auction-determined interest rate was constrained by a maximum rate which could prevent the auctions from...
Should You Cash Out Your Home Equity to Find Your Missed Fortune? Careful! A Scam Might Be On the Way
(Feb 2012)
As a result of a lifetime of thrift, many homeowners find themselves in their 50s and 60s with considerable equity in their homes. Some investment advisors and insurance salesmen have been recommending that these homeowners refinance their mortgages to take the equity out of their homes - sometime called "equity harvesting" - to purchase high cost insurance contracts or investments. Whether insurance contracts or high cost investments are being pitched, the advisors and brokers get a big pay...
