An Update on Levered ETFs

Levered ETFs are designed to track a particular benchmark, but in an exaggerated fashion. For example, the Pro Shares Ultra S&P500 (SS0) is a 2X fund, meaning its performance should be twice the level of the index. However, this performance only matches short term. In particular, since volatility reduces compounded returns, levered funds "lose" performance through time. In fact, some funds may actually produce a negative buy-and-hold return during even if the underlying benchmark was positive. Unfortunately, many retail investors are flocking to these funds without understanding their risks. (See article here, Reuters.) In recent events, the SEC just announced approval of a quadruple-leveraged ETF, which will further exaggerate the issues described above. (See article here, Reuters.)

Record Margin Levels

Margin debt rose to a record $528 billion in February. This is likely a sign of growing investor confidence, but some warn that it signals a market peak, as such high levels have often preceded steep market declines. See article here (WSJ).

Ban Dual-Class Shares?

Company founders have used dual-class share structures to retain voting control, even without a majority of the share ownership. Many tech companies have adopted such systems, with some being quite extreme. For example, Groupon founders own shares that provide them the equivalent of 150 votes per share, and Snap (parent of Snapchat) plans to go public and give common shareholders no voting rights. Money managers are beginning to band together in hopes of eliminating such structures. See article here, WSJ.

Dow 20,000

Following a post-election rally, the Dow has recently crossed 20,000. But, what does this really mean? Check out a recent article in the WSJ.

Voting Rights?

In recent years, tech companies in particular have widely used different share classes as a way for founders to retain voting control even after the firm goes public. In an extreme move, however, Snap Inc. is issuing public shares that actually carry zero votes, leaving all control with the founders. See article here, Morningstar.

All Exchange Traded Products Are NOT Created Equal

Exchange traded products have exploded in both popularity and size. While most of these investments are ETFs (or Exchange Traded Funds), a handful are ETNs (or Exchange Traded Notes). ETFs actually hold assets in the underlying index the fund is designed to track. ETNs, on the other hand, are debt securities issued by the provider, whose return is intended to track a particular index. Because it is a debt instrument, however, there are additional credit risks, and many providers have pulled back their support of such products, leaving some investors holding illiquid securities. See article here, WSJ.

Massive Futures Trade

On December 7, 2016, a single trader apparently took a position of $1.8 billion in S&P500 futures. This was the largest trade of the year, more than doubling the size of the next largest trade. There is speculation regarding the reason behind the trade, but the result was an increase in buying across other traders, driving the market to high levels. See article here, WSJ.