The Big Picture For The Week Of July 1, 2007

6 Comments

  1. forgot two things; this was with a fair bit of cash built up and less the management fee.

    Reply
  2. Roger:
    Can you please tell us how inverse ETFs work. I understand short selling of ETFs.
    But how does inverse ETFs work?
    IF I buy $ 1000 worth of SPY ETF, I can understand that the ETF provider will buy $ 1000 worth of underlying stocks.

    When I buy 1000$ worth of an inverse ETF, say inverse ETF of spy, what does the ETF provider buy with the money?

    Could you also please explain how double long and double Short ETFs work and how they are implemented by the ETF issuer.

    Thanks for your time.

    Yours,
    Stranger.

    Reply
  3. Inverse ETFs; they are mostly invested in T-bills which is where the interest comes from. The funds use derivatives to create the effect of being short or double short. Given the leverage the funds need only a small fraction of the assets to create the short exposure.

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  4. Roger:
    Thanks for your response on how inverse ETFs work.
    Regards,
    yours,
    stranger

    Reply
  5. Hi Roger – This is an interesting thread as I’ve wondered about this myself. If ProShares (the company that’s launched QID and DXD) is using options to manufacture the double-short effect, then wouldn’t those options be experiencing enormous influxes of money and attention? Other ETFs just need to buy the underlying stocks they’re comprised of, but the machinations necessary to invert these ETFs seems like they could actually “break”.

    Any thoughts? If the market crashed extremely fast or the market spiked, would the options markets actually be able to carry the burden?

    Reply
  6. Specifically they use futures contracts and the liquidity is very adequate from all I have ever read.

    Reply

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The Big Picture For The Week Of July 1, 2007

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