3 ms·

"Let me help an individual investor grow their portfolio" - said no investment banker ever. Most leveraged ETF (ETN) are designed by investment banks, this one

"Let me help an individual investor grow their portfolio" - said no investment banker ever. Most leveraged ETF (ETN) are designed by investment banks, this one was designed by UBS. They are designed for the benefit of one party - the designer of the ETF - the investment bank. The design has one goal - to transfer your investment to them, slowly over time. A vanilla bond or stock ETF is an extremely useful (and beautiful) financial instrument that has democratized investing similar to its older cousin the mutual fund. Almost every ETF other than a vanilla bond/stock ETF is unadulterated toxic waste that has oozed out from the sewers of finance and will wipe out your capital. A simple yardstick to demarcate toxic waste for the good ole fashioned bond/stock ETFs - if you cannot redeem/create it then don't touch it. Leveraged ETFs (and commodity ETFs) cannot be redeemed/created. Guide to ETF redemption/creation - https://www.etf.com/etf-education-center/etf-basics/what-is-the-creationredemption-mechanism?nopaging=1 https://www.etf.com/etf-education-center/etf-basics/what-is-...

deleted 6y ago
[deleted]
Enginerrrd 6y ago
I learned this the hard way during the 2008(ish) crisis when oil dropped from $150/barrel to ~$30/barrel and I sold other assets at a loss to buy USO (an ETF that was ostensibly supposed to track the price of oil). Instead, when oil went up to $80/barrel in a few months, USO increased by ~3% while the other stuff I'd sold at a loss had rebounded (though to a lessor extent than the price of a barrel of oil). SOMEbody made a multigenerational fortune off of that price discrepancy. The SEC was briefly investigating that episode, but the investigation went away after a while. As a little guy, you can make a brilliant play by correctly predicting the future and still get totally screwed.
- toomuchtodo 6y ago
  Why did you use USO instead of trading oil futures contracts?
  - chadash 6y ago
    Same here with USO. I didn't fully understand it at the time, so I used USO because you can buy and sell like a stock. I thought that it would just be a proxy for investing in oil futures contracts, similar to how buying SPY is basically a proxy for buying a weighted basket of stocks in the S&P. I learned that I was wrong the hard way (luckily didn't wager anything I couldn't afford to lose).
- jdsully 6y ago
  That futures rollover is a real killer, the winners were sellers of the contracts knowing the ETF would be forced to rollover.
- haltingproblem 6y ago
  Sorry to hear that atleast you learnt the lesson early. The big flaw is understanding the myth of the "price of oil". There is no such thing. There are grades and dates and delivery locations and the price of storage. You are trading to one point in this multi-dimensional space. In normal times it appears in just one dimension - time - but it times of stress, it explodes.
JumpCrisscross 6y ago
> "Let me help an individual investor grow their portfolio" - said no investment banker ever Nobody can honestly say this. Trading is about risk transfer. And risks sometimes come home to roost, which means portfolios can always lose money. That said, broadly, yes. If something seems too complicated, don't buy it. > Almost every ETF other than a vanilla bond/stock ETF is unadulterated toxic waste that has oozed out from the sewers of finance and will wipe out your capital This is true, but not (just) because banks are venal. These products are designed for professional traders. There is hedging value, to certain corporates, for having a short-dated commodities future exchange traded product (ETP) leveraged at a benchmark rate. Particularly if that rate floats with the corporate's cost of capital. > good ole fashioned bond/stock ETFs - if you cannot redeem/create it then don't touch it Individual investors can never redeem or create ETF units. That's restricted to authorized participants (APs). APs can create and destroy units of most leveraged ETFs. They can't do that for exchange-traded notes (ETNs), which is where most of the structured stuff lives.
- haltingproblem 6y ago
  Atleast we agree on the venality of investment banks ;) Professional traders don't trade leveraged ETFs (ETNs) because they know the friction and carry built into them. A professional trader who wants to make a leveraged bet on S&P will just use e-mini futures. You missed the point about create/redeem. When I create in SPY I can submit a basket+cash component equivalent to 50,000 shares and get back 50,000 SPY. For redeem, I can submit SPY and get back the equivalent basket and cash component. ProShares Ultra QQQ (3x NASDAQ) had $5.4B in the trust as per Yahoo finance. The holdings [1] had $13.7B in swaps, $0.5B in treasuries and $2B in stock. How exactly would I create/redeem this basket in kind? [1] https://www.proshares.com/funds/tqqq_daily_holdings.html https://www.proshares.com/funds/tqqq_daily_holdings.html
  - JumpCrisscross 6y ago
    > When I create in SPY I can submit a basket+cash component equivalent to 50,000 shares and get back 50,000 SPY No, you can't. An authorized participant can. All ETFs, by definition, involve creation and redemption mechanisms. It's what separates them from other ETPs. > How exactly would I create/redeem this basket in kind? You can't. According to the prospectus [1], "in exchange for the deposit or delivery of a basket of assets (securities and/or cash)". Going into deeper mechanics [2], creation and redemption involve the AP entering into offsetting swaps with the ETP. [1] https://www.proshares.com/media/prospectus/statutory_prospectus.pdf?param=1591047174795 https://www.proshares.com/media/prospectus/statutory_prospec... [2] https://www.proshares.com/media/prospectus/statement_of_additional_information.pdf?param=1591047456507 https://www.proshares.com/media/prospectus/statement_of_addi...
cosmojg 6y ago
Many leveraged ETFs can be redeemed or created, though. ETFs and ETNs are two very different products. ProShares, the issuer behind the popular 3x leveraged NASDAQ 100 and S&P 500 ETFs TQQQ and UPRO, even publishes a fee schedule for redeeming and creating their products [1]. Also, unlike with ETNs, if the issuer of am ETF goes under, you receive the underlying assets. In other words, there's no counterparty risk. I agree that leveraged ETFs can be dangerous if used incorrectly (look up volatility decay), but they aren't "trash" and they certainly aren't anywhere near as dangerous as even unleveraged ETNs. Here's a resource about the difference between those two, by the way [2]. In short, ETF shares represent a direct stake in the underlying assets, similar to owning equity in a house or business. ETN shares are more like little IOUs along the lines of bonds and loans. They have their place, but they're difficult to use safely, especially when leverage is involved. [1] https://www.proshares.com/resources/creation_and_redemption_fees.html https://www.proshares.com/resources/creation_and_redemption_... [2] https://www.investopedia.com/financial-edge/0213/etf-or-etn-whats-the-difference.aspx https://www.investopedia.com/financial-edge/0213/etf-or-etn-...
- haltingproblem 6y ago
  They can be redeemed or created but that is a facility for market makers. The redemption is not in kind since you can't redeem swaps. I posted an example in the thread above.
centimeter 6y ago
An ETF is by definition something that can be created or redeemed. If it can't be created or redeemed, then it's an ETN, which is completely different. Leveraged ETFs are usually composed of debt plus equity, and they can certainly be created and redeemed. You personally cannot create or redeem any ETF, because the quantities involved are huge and you need to be what's called an "authorized participant".
- haltingproblem 6y ago
  Any hedge fund or market participant of decent size (by volume) can access the create/redeem market through their trading desk or prime broker. Create/redeem is a pain for the clearing broker as they have move cash/securities around but if you give them enough business they will do it for you.

deleted 6y ago

[deleted]

Enginerrrd 6y ago

I learned this the hard way during the 2008(ish) crisis when oil dropped from $150/barrel to ~$30/barrel and I sold other assets at a loss to buy USO (an ETF that was ostensibly supposed to track the price of oil). Instead, when oil went up to $80/barrel in a few months, USO increased by ~3% while the other stuff I'd sold at a loss had rebounded (though to a lessor extent than the price of a barrel of oil). SOMEbody made a multigenerational fortune off of that price discrepancy. The SEC was briefly investigating that episode, but the investigation went away after a while. As a little guy, you can make a brilliant play by correctly predicting the future and still get totally screwed.

toomuchtodo 6y ago
Why did you use USO instead of trading oil futures contracts?
- chadash 6y ago
  Same here with USO. I didn't fully understand it at the time, so I used USO because you can buy and sell like a stock. I thought that it would just be a proxy for investing in oil futures contracts, similar to how buying SPY is basically a proxy for buying a weighted basket of stocks in the S&P. I learned that I was wrong the hard way (luckily didn't wager anything I couldn't afford to lose).
jdsully 6y ago
That futures rollover is a real killer, the winners were sellers of the contracts knowing the ETF would be forced to rollover.
haltingproblem 6y ago
Sorry to hear that atleast you learnt the lesson early. The big flaw is understanding the myth of the "price of oil". There is no such thing. There are grades and dates and delivery locations and the price of storage. You are trading to one point in this multi-dimensional space. In normal times it appears in just one dimension - time - but it times of stress, it explodes.

JumpCrisscross 6y ago

> "Let me help an individual investor grow their portfolio" - said no investment banker ever Nobody can honestly say this. Trading is about risk transfer. And risks sometimes come home to roost, which means portfolios can always lose money. That said, broadly, yes. If something seems too complicated, don't buy it. > Almost every ETF other than a vanilla bond/stock ETF is unadulterated toxic waste that has oozed out from the sewers of finance and will wipe out your capital This is true, but not (just) because banks are venal. These products are designed for professional traders. There is hedging value, to certain corporates, for having a short-dated commodities future exchange traded product (ETP) leveraged at a benchmark rate. Particularly if that rate floats with the corporate's cost of capital. > good ole fashioned bond/stock ETFs - if you cannot redeem/create it then don't touch it Individual investors can never redeem or create ETF units. That's restricted to authorized participants (APs). APs can create and destroy units of most leveraged ETFs. They can't do that for exchange-traded notes (ETNs), which is where most of the structured stuff lives.

haltingproblem 6y ago
Atleast we agree on the venality of investment banks ;) Professional traders don't trade leveraged ETFs (ETNs) because they know the friction and carry built into them. A professional trader who wants to make a leveraged bet on S&P will just use e-mini futures. You missed the point about create/redeem. When I create in SPY I can submit a basket+cash component equivalent to 50,000 shares and get back 50,000 SPY. For redeem, I can submit SPY and get back the equivalent basket and cash component. ProShares Ultra QQQ (3x NASDAQ) had $5.4B in the trust as per Yahoo finance. The holdings [1] had $13.7B in swaps, $0.5B in treasuries and $2B in stock. How exactly would I create/redeem this basket in kind? [1] https://www.proshares.com/funds/tqqq_daily_holdings.html https://www.proshares.com/funds/tqqq_daily_holdings.html
- JumpCrisscross 6y ago
  > When I create in SPY I can submit a basket+cash component equivalent to 50,000 shares and get back 50,000 SPY No, you can't. An authorized participant can. All ETFs, by definition, involve creation and redemption mechanisms. It's what separates them from other ETPs. > How exactly would I create/redeem this basket in kind? You can't. According to the prospectus [1], "in exchange for the deposit or delivery of a basket of assets (securities and/or cash)". Going into deeper mechanics [2], creation and redemption involve the AP entering into offsetting swaps with the ETP. [1] https://www.proshares.com/media/prospectus/statutory_prospectus.pdf?param=1591047174795 https://www.proshares.com/media/prospectus/statutory_prospec... [2] https://www.proshares.com/media/prospectus/statement_of_additional_information.pdf?param=1591047456507 https://www.proshares.com/media/prospectus/statement_of_addi...

cosmojg 6y ago

Many leveraged ETFs can be redeemed or created, though. ETFs and ETNs are two very different products. ProShares, the issuer behind the popular 3x leveraged NASDAQ 100 and S&P 500 ETFs TQQQ and UPRO, even publishes a fee schedule for redeeming and creating their products [1]. Also, unlike with ETNs, if the issuer of am ETF goes under, you receive the underlying assets. In other words, there's no counterparty risk. I agree that leveraged ETFs can be dangerous if used incorrectly (look up volatility decay), but they aren't "trash" and they certainly aren't anywhere near as dangerous as even unleveraged ETNs. Here's a resource about the difference between those two, by the way [2]. In short, ETF shares represent a direct stake in the underlying assets, similar to owning equity in a house or business. ETN shares are more like little IOUs along the lines of bonds and loans. They have their place, but they're difficult to use safely, especially when leverage is involved. [1] https://www.proshares.com/resources/creation_and_redemption_fees.html https://www.proshares.com/resources/creation_and_redemption_... [2] https://www.investopedia.com/financial-edge/0213/etf-or-etn-whats-the-difference.aspx https://www.investopedia.com/financial-edge/0213/etf-or-etn-...

haltingproblem 6y ago
They can be redeemed or created but that is a facility for market makers. The redemption is not in kind since you can't redeem swaps. I posted an example in the thread above.

centimeter 6y ago

An ETF is by definition something that can be created or redeemed. If it can't be created or redeemed, then it's an ETN, which is completely different. Leveraged ETFs are usually composed of debt plus equity, and they can certainly be created and redeemed. You personally cannot create or redeem any ETF, because the quantities involved are huge and you need to be what's called an "authorized participant".

haltingproblem 6y ago
Any hedge fund or market participant of decent size (by volume) can access the create/redeem market through their trading desk or prime broker. Create/redeem is a pain for the clearing broker as they have move cash/securities around but if you give them enough business they will do it for you.