Getting Leverage. g g Going Short. Live Webinar Live Webinar May - - PowerPoint PPT Presentation

▶
getting leverage g g going short
SMART_READER_LITE
LIVE PREVIEW

Getting Leverage. g g Going Short. Live Webinar Live Webinar May - - PowerPoint PPT Presentation

Nov 28, 2022 6 likes •307 views

Getting Leverage. g g Going Short. Live Webinar Live Webinar May 14, 2009 2:00 3:00 pm EDT Definitions Definitions A leveraged ETF attempts to provide returns A leveraged ETF attempts to provide returns equivalent to a multiple (2x, 3x) of

slide-1
SLIDE 1

Getting Leverage. g g Going Short.

Live Webinar Live Webinar May 14, 2009 2:00 – 3:00 pm EDT

slide-2
SLIDE 2

Definitions Definitions

A leveraged ETF attempts to provide returns A leveraged ETF attempts to provide returns equivalent to a multiple (2x, 3x) of a benchmark,

  • ver a specific period of time
  • ver a specific period of time.

A i ETF id An inverse ETF attempts to provide returns

  • pposite, and often leveraged, to a benchmark,

ifi i d f i

  • ver a specific period of time.
slide-3
SLIDE 3

History History

First leveraged index fund Rydex Nova Fund, 1.5x S&P 500 First leveraged ETFs ProShares 2x ETFs

1993 1995 2000 2005 2008

Continued Expansion First inverse fund ProFunds and Potomac (now Direxion) Direxion launches 3x ETFs Rydex URSA Fund, ‐1x S&P 500 ( )

  • ProFunds – 2 beta funds
  • Potomac – 1.25 beta
slide-4
SLIDE 4

Tremendous Growth Tremendous Growth

Most major asset classes Range from 3x to ‐3x Over 100 ETFs and ETNs > $30 billion in assets 27% of daily trading volume

slide-5
SLIDE 5

Tremendous Growth Tremendous Growth

Leveraged/Inverse Assets Leveraged/Inverse Assets US$, Millions

30,466 17,254 30,466 4,775 April‐06 April‐07 April‐08 April‐09 April‐06 April‐07 April‐08 April‐09

slide-6
SLIDE 6

Tremendous Growth Tremendous Growth

2009 Flows (through April)

Long (Traditional)

009

  • s (t
  • ug

p )

Short‐Levered Long‐Levered Short ‐4,000 ‐2,000 2,000 4,000 6,000 8,000 10,000 12,000 US$, Millions US$, Millions

slide-7
SLIDE 7

Tremendous Growth Tremendous Growth

April 2009 ETF Assets p 009 ssets

Long‐Levered 2% Long Short 1%

  • ng

(Traditional) 94% Short‐Levered 3%

slide-8
SLIDE 8

Tremendous Growth Tremendous Growth

April 2009 ETF Volume

Long‐Levered 9%

p 009

  • u

e

Short 0% Long Short‐Levered 18% g (Traditional) 73%

slide-9
SLIDE 9

Headline Horror! Headline Horror!

“Warning: Leveraged and Inverse ETFs Kill Portfolios

Too many people are making sucker bets with these products.”

Morningstar, 1/22/09

slide-10
SLIDE 10

The Big Myths The Big Myths

1.

They deliver x% of an index’s long‐term return y g

Wrong – it’s all about holding period

2.

They have huge tracking error

No – they generally track very well

3.

People use them incorrectly

Not if you look at the volumes Not if you look at the volumes

4.

They’re ETFs, so they must be tax efficient

Shorting and leverage are rarely tax efficient

5.

They’re poison

No; they’re a very, very sharp tool in the drawer

slide-11
SLIDE 11

How They Work How They Work

Exposure through derivatives ‐ Swaps are the vehicle of choice The Swap ‐ Contract with a counterparty ‐ An agreement to pay a daily return ‐ Not a traded security (like a bond) y ( ) ‐ Rebalanced regularly ‐ Minimal risk – settlement gap Minimal risk settlement gap

slide-12
SLIDE 12

Long‐Term Returns Long Term Returns

slide-13
SLIDE 13

Tracking Error? Not Really Tracking Error? Not Really

Compounding Path Dependency p y Leverage Drag

slide-14
SLIDE 14

Short Term: No Problem Short Term: No Problem

slide-15
SLIDE 15

It’s All About Timing! It s All About Timing!

slide-16
SLIDE 16

It’s by design

slide-17
SLIDE 17

Tracking Error? Not Really Tracking Error? Not Really

Day 1: Index Level: 100 y ‐200% ETF Level: 100 Day 2: Index up 10% Day 2: Index up 10% Index Level: 110 ‐200% ETF Level: 80 Day 3: Index down 10% Index Level: 99 ‐200% ETF Level: 96

slide-18
SLIDE 18

Complex Structure of Leverage Complex Structure of Leverage

Index (1‐yr) 300% Inverse 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Index Volatility ‐50% 150% 646.16% 526.52% 367.83% 210.27% 82.30% ‐5.83% ‐56.92% ‐82.75% ‐94.02% ‐98.16% ‐45% 135% 462.16% 371.63% 252.06% 132.80% 36.63% ‐29.20% ‐67.72% ‐87.22% ‐95.56% ‐98.67% ‐40% 120% 333.89% 263.88% 171.20% 79.08% 4.73% ‐45.87% ‐75.48% ‐90.23% ‐96.66% ‐99.00% ‐35% 105% 241.84% 186.47% 113.21% 40.76% ‐17.82% ‐57.91% ‐80.87% ‐92.48% ‐97.40% ‐99.23% ‐30% 90% 174.04% 129.54% 70.66% 12.62% ‐34.34% ‐66.31% ‐84.69% ‐93.93% ‐97.94% ‐99.39% ‐25% 75% 122.98% 86.72% 38.73% ‐8.73% ‐46.94% ‐72.77% ‐87.75% ‐95.18% ‐98.36% ‐99.52% ‐20% 60% 83.86% 53.86% 14.16% ‐24.84% ‐56.35% ‐77.65% ‐90.01% ‐96.05% ‐98.66% ‐99.61% ‐15% 45% 53.34% 28.29% ‐4.90% ‐37.43% ‐63.71% ‐81.50% ‐91.74% ‐96.75% ‐98.90% ‐99.68% ‐10% 30% 29.22% 7.99% ‐19.99% ‐47.46% ‐69.65% ‐84.59% ‐93.12% ‐97.32% ‐99.10% ‐99.74% ‐5% 15% 9.86% ‐8.23% ‐31.99% ‐55.50% ‐74.20% ‐86.85% ‐94.19% ‐97.73% ‐99.24% ‐99.78% 0% 0% 5 81% 21 33% 41 83% 61 95% 78 04% 88 87% 95 02% 98 08% 99 36% 99 81% 0% 0% ‐5.81% ‐21.33% ‐41.83% ‐61.95% ‐78.04% ‐88.87% ‐95.02% ‐98.08% ‐99.36% ‐99.81% 5% ‐15% ‐18.65% ‐32.07% ‐49.84% ‐67.11% ‐81.14% ‐90.44% ‐95.78% ‐98.36% ‐99.47% ‐99.85% 10% ‐30% ‐29.28% ‐40.99% ‐56.40% ‐71.49% ‐83.62% ‐91.76% ‐96.37% ‐98.61% ‐99.53% ‐99.87% 15% ‐45% ‐38.13% ‐48.39% ‐61.93% ‐75.17% ‐85.74% ‐92.80% ‐96.83% ‐98.79% ‐99.60% ‐99.89% 20% ‐60% ‐45.57% ‐54.62% ‐66.57% ‐78.23% ‐87.48% ‐93.73% ‐97.25% ‐98.95% ‐99.66% ‐99.90% 25% ‐75% ‐51.88% ‐59.92% ‐70.50% ‐80.80% ‐88.99% ‐94.49% ‐97.58% ‐99.08% ‐99.70% ‐99.92% 30% ‐90% ‐57.24% ‐64.41% ‐73.83% ‐82.99% ‐90.31% ‐95.15% ‐97.87% ‐99.19% ‐99.74% ‐99.93% 35% ‐105% ‐61.86% ‐68.26% ‐76.66% ‐84.91% ‐91.38% ‐95.70% ‐98.15% ‐99.29% ‐99.77% ‐99.94% 40% ‐120% ‐65.82% ‐71.57% ‐79.13% ‐86.48% ‐92.33% ‐96.21% ‐98.36% ‐99.38% ‐99.80% ‐99.95% 45% ‐135% ‐69.26% ‐74.49% ‐81.32% ‐87.96% ‐93.16% ‐96.60% ‐98.55% ‐99.46% ‐99.83% ‐99.95% 50% ‐150% ‐72.26% ‐76.98% ‐83.17% ‐89.16% ‐93.88% ‐96.98% ‐98.69% ‐99.52% ‐99.85% ‐99.96%

slide-19
SLIDE 19

How Long Can You Hold? How Long Can You Hold?

Journal of Indexes Study, March 2009 Journal of Indexes Study, March 2009

ProShares Ultra Dow30 (NYSE Arca: DDM) ProShares Short Dow30 (NYSE Arca: DOG) ProShares UltraShort Dow30 (NYSE Arca: DXD)

slide-20
SLIDE 20

How Long Can You Hold? How Long Can You Hold?

1‐Day Tracking Error

0 25% 0.50% DDM DOG DXD 0.00% 0.25% ‐0.25% ‐0.50% 1 101 201 301 401 501 601

slide-21
SLIDE 21

How Long Can You Hold? How Long Can You Hold?

95% Interval

9.00% 12.00%

1‐Day Tracking Error

0.06% 0 09% 0.13% 0 00% 3.00% 6.00% 0.09% ‐0.13% ‐0.06% ‐0.13% ‐6.00% ‐3.00% 0.00% ‐12.00% ‐9.00% DDM DOG DXD

slide-22
SLIDE 22

How Long Can You Hold? How Long Can You Hold?

95% Interval 1 W k I d V i

9.00% 12.00%

1‐Week Index Variance

0.22% 0.26% 0.54% 0 00% 3.00% 6.00% ‐0.74% ‐1.00% ‐2.78% ‐6.00% ‐3.00% 0.00% ‐12.00% ‐9.00% DDM DOG DXD

slide-23
SLIDE 23

How Long Can You Hold? How Long Can You Hold?

95% Interval 1 M th I d V i

9.00% 12.00%

1‐Month Index Variance

0.54% 0.94% 1.94% 0 00% 3.00% 6.00% ‐2.83% ‐3.98% ‐6.00% ‐3.00% 0.00% ‐11.82% ‐12.00% ‐9.00% DDM DOG DXD

slide-24
SLIDE 24

DXD Holding In Review DXD Holding In Review

1‐Day 1‐Week 1‐Month 1‐Year Worst Case ‐0.47% ‐6.05% ‐16.02% ‐21.73% Interval ‐0.13% ‐2.78% ‐11.82% ‐12.60% 95% 0.13% 0.54% 1.94% 23.52% Best Case 0.39% 8.09% 16.54% 52.62%

slide-25
SLIDE 25

Solving the Tracking Issue Solving the Tracking Issue

Day 1: Index Level: 100 Initial ‐200% ETF Investment: $100 Initial 200% ETF Investment: $100 Day 2: Index up 10% Index Level: 110 ETF Investment: $80 Additional Investment: $30 Total ETF Investment: $110 Day 3: Index down 5% Index Level: 104.5 ETF I $121 ETF Investment: $121

Net result: Index up 4 5% position loss of 9% on initial investment Net result: Index up 4.5%, position loss of 9% on initial investment

slide-26
SLIDE 26

A Different Path: Monthly? A Different Path: Monthly?

Shifting Math Shifting Math Funds should track as expected if:

You get in on day 1 ‐ You get in on day 1 ‐ You get out on reset

Intra‐period entries get different exposure

slide-27
SLIDE 27

A Different Path: Monthly? A Different Path: Monthly?

Day 1 Day 15 Day 30 Index 5% Index 5% 3x Return 15% Index 10% 3x Return 30% Index 4.76% 3x Return 13.04% Midmonth investor gets less exposure per dollar invested (when the month is positive), or more exposure when the p ) p month is negative.

slide-28
SLIDE 28

Key Issue: Liquidity Key Issue: Liquidity

It’s all about spreads It s all about spreads

RTG (Rydex 2x Tech): Average Volume: ~6,000 shares Spread: 3.5% QLD (ProShares 2x QQQ): Average Volume: ~30 million shares Spread: Consistently a penny

slide-29
SLIDE 29

Key Issue: Taxes Key Issue: Taxes

The Rydex Problem 2008 Cap Gains The Rydex Problem: 2008 Cap Gains

ETF Name Ticker Short‐Term Long‐Term Total Gains Rydex Inverse 2X S&P Select Sector Energy REC 86.61% 0.00% 86.61% Rydex Inverse 2X S&P Select Sector Technology RTW 59.46% 0.00% 59.46% Rydex Inverse 2X S&P Select Sector Financial RFN 42.35% 7.32% 49.67%

slide-30
SLIDE 30

Panel Discussion Panel Discussion

Louis Stanasolovich Dan D O'Neill Louis Stanasolovich CEO & President Legend Financial Advisors, Inc. Dan D. O Neill President & CIO Direxionfunds Direxionshares

  • Editor of the monthly newsletter,

Risk‐Controlled Investing

  • Responsible for Trading &

Operations

  • Worth “Top Wealth Advisors’ 12

consecutive years Th ti b f

  • Designer of Direxion product
  • fferings

E i d lt ti t t i

  • Three times member of

Investment Advisor’s “IA 25”

  • Experienced alternative‐strategies

portfolio manager