“Volatility is Not an Asset Class”

The WSJ had a blog post further detailing the peculiar odyssey of the Velocity Shares Daily 2x VIX Short Term ETN (TVIX). A lengthy part of the post was devoted to the thoughts of one portfolio manager who among other things said that volatility is an indicator not an asset class. The chart shows a spectacular implosion in the price of the shares. As mentioned last week the crazy action is mostly about a disruption in the normal creation/redemption process. There are several types of glitches/malfunctions that can create serious problems but this event seems to be especially remarkable for the number of buzzwords this fund takes in; ETN, leveraged, futures, VIX. There is probably no way to know what portion of the volume or AUM in TVIX is for speculation and what portion is from hedging with the hedge idea being as stocks go down the VIX will go up and a 2x VIX will go up more. The idea with speculating on VIX in one form or another is that the VIX moves around a lot in both directions which makes for good action for speculative trading. The idea of volatility being an asset class would seem to be in the context of building a portfolio that includes alternative asset classes that have low correlations to equities. This could be thought of along the lines of market neutral funds, absolute return funds, merger arbitrage funds and any other number of so called hedge fund-like products. TVIX is not the only VIX product with questionable benefit. The troubles with VXX have been widely written about so you can...

"Volatility is Not an Asset Class"

The WSJ had a blog post further detailing the peculiar odyssey of the Velocity Shares Daily 2x VIX Short Term ETN (TVIX). A lengthy part of the post was devoted to the thoughts of one portfolio manager who among other things said that volatility is an indicator not an asset class. The chart shows a spectacular implosion in the price of the shares. As mentioned last week the crazy action is mostly about a disruption in the normal creation/redemption process. There are several types of glitches/malfunctions that can create serious problems but this event seems to be especially remarkable for the number of buzzwords this fund takes in; ETN, leveraged, futures, VIX. There is probably no way to know what portion of the volume or AUM in TVIX is for speculation and what portion is from hedging with the hedge idea being as stocks go down the VIX will go up and a 2x VIX will go up more. The idea with speculating on VIX in one form or another is that the VIX moves around a lot in both directions which makes for good action for speculative trading. The idea of volatility being an asset class would seem to be in the context of building a portfolio that includes alternative asset classes that have low correlations to equities. This could be thought of along the lines of market neutral funds, absolute return funds, merger arbitrage funds and any other number of so called hedge fund-like products. TVIX is not the only VIX product with questionable benefit. The troubles with VXX have been widely written about so you can...

Good News; They’re Profitable!

ETF Trends had a post covering the growth of new all ETF portfolio solutions being offered, based on the article, by large banks. The article excerpted a MarketWatch story that had a lot of quotes from someone at Wells Fargo about their product suite and the extent to which they wouldn’t offer the products if they were not profitable. These might be a tough sell after a VP of something or other brags about the profit being made off of $25,000 accounts. I don’t know anything about the specific portfolios that Wells Fargo offers but I have seen similar portfolios from other firms and from what I have seen they target broad asset classes only using broad index funds. They are easy for the client-contact person to implement as about all they do is select one of some number of possible portfolios and then the rest of the process is automated. The portfolios aren’t necessarily bad in and of themselves. Some folks are better using only the broadest funds and if history repeats and the market has an up year 72% of the time then these portfolios will do just fine at least 72% of the time. They may or may not beat the market but they will be close either way and that can be good enough most of the time for people who are good savers. I realize the last decade or so works against this argument but I believe select global markets will have normal decades going forward as they did over the last ten years. Obviously if the portfolios are unmanaged then they will feel...

Good News; They’re Profitable!

ETF Trends had a post covering the growth of new all ETF portfolio solutions being offered, based on the article, by large banks. The article excerpted a MarketWatch story that had a lot of quotes from someone at Wells Fargo about their product suite and the extent to which they wouldn’t offer the products if they were not profitable. These might be a tough sell after a VP of something or other brags about the profit being made off of $25,000 accounts. I don’t know anything about the specific portfolios that Wells Fargo offers but I have seen similar portfolios from other firms and from what I have seen they target broad asset classes only using broad index funds. They are easy for the client-contact person to implement as about all they do is select one of some number of possible portfolios and then the rest of the process is automated. The portfolios aren’t necessarily bad in and of themselves. Some folks are better using only the broadest funds and if history repeats and the market has an up year 72% of the time then these portfolios will do just fine at least 72% of the time. They may or may not beat the market but they will be close either way and that can be good enough most of the time for people who are good savers. I realize the last decade or so works against this argument but I believe select global markets will have normal decades going forward as they did over the last ten years. Obviously if the portfolios are unmanaged then they will feel...

Sector Bond Funds

There was a meaningful evolution in fixed income ETFs yesterday when iShares came out with three corporate bond ETFs that target sectors; Financials Sector Bond Fund (MONY), Utilities Sector Bond Fund (AMPS) and Industrials Sector Bond Fund (ENGN). Buying bonds is not always easy to do for individual investors as a function of size and also the ability (time wise) to track many different individual issues held. The fixed income space in ETF land has become a lot deeper in the last year or so with many foreign funds having come out, I think the concept of the BulletShares from Guggenheim is very useful and now we see the first sector ETFs for domestic corporates. I think the old Claymore (now Guggenheim) registered similar funds but I am pretty sure they never came to fruition. The ability to use corporate bond funds without financials is a huge step forward. We own individual issues as part of our fixed income mix but we also use some funds. Long time readers may recall I prefer a mix of both in building both the equity and fixed income sides of the portfolio and so the extent to which the fund side branches into new territory is useful. The effective duration of ENGN is 7.3 years and the yield to maturity is 3.07%. For MONY the effective duration is 5.4 years and the YTM is 3.84% and for AMPS the effective duration is 8.55 years with a YTM of 3.44%. Those yields may or may not look attractive to you given that overnight money yields zero but don’t forget that the way bond...

Sector Bond Funds

There was a meaningful evolution in fixed income ETFs yesterday when iShares came out with three corporate bond ETFs that target sectors; Financials Sector Bond Fund (MONY), Utilities Sector Bond Fund (AMPS) and Industrials Sector Bond Fund (ENGN). Buying bonds is not always easy to do for individual investors as a function of size and also the ability (time wise) to track many different individual issues held. The fixed income space in ETF land has become a lot deeper in the last year or so with many foreign funds having come out, I think the concept of the BulletShares from Guggenheim is very useful and now we see the first sector ETFs for domestic corporates. I think the old Claymore (now Guggenheim) registered similar funds but I am pretty sure they never came to fruition. The ability to use corporate bond funds without financials is a huge step forward. We own individual issues as part of our fixed income mix but we also use some funds. Long time readers may recall I prefer a mix of both in building both the equity and fixed income sides of the portfolio and so the extent to which the fund side branches into new territory is useful. The effective duration of ENGN is 7.3 years and the yield to maturity is 3.07%. For MONY the effective duration is 5.4 years and the YTM is 3.84% and for AMPS the effective duration is 8.55 years with a YTM of 3.44%. Those yields may or may not look attractive to you given that overnight money yields zero but don’t forget that the way bond...