Tag Archives: xlv

Sell This Rumor: Hedge Funds Exploit ETF Ecosystem

The battle between business news pontificaters across the 4th estate is in full season, as evidenced by a smart article yesterday by Bloomberg LP’s Eric Balchunas and suggests that MarketsMuse curators are apparently not the only topic experts who noticed and took aim at a recent WSJ article that proclaimed savvy hedge fund types are increasingly exploiting exchange-traded funds by arbitraging price anomalies between the underlying constituents and the ETF cash product that occur in volatile moments.

That original WSJ article, “Traders Seek Ways to benefit from ETF woes …At the Expense of Investors” was misleading, and as noted by MarketsMuse Sept 30 op-ed reply to the WSJ piece, one long time ETF expert asserted that WSJ’s conclusions was “much ado about nothing.” Bloomberg’s Balchunas has since reached a similar conclusion; below are extracted observations from his Oct 12 column..

Hedge funds may need to get back to the drawing board if they’re planning to turn around their performance struggles by capitalizing on “shortcomings in the ETFs’ structure” via some unusual trade ideas, as highlighted in this recent Wall Street Journal article. Most funds do nothing of the sort.

Eric Balchunas, Bloomberg LP
Eric Balchunas Bloomberg LP

The vast majority of ETF usage by hedge funds is very boring. They love to short ETFs to get their hedge on and isolate some kind of risk. For example, they may short the Health Care Select Sector SPDR ETF (XLV) and then make a bet on one of the health-care stocks in the basket in order to quarantine a single security bet. Hedge funds have about $116 billion worth of ETF shares shorted, compared with only $34 billion in long positions, according to data compiled by Goldman Sachs last year.

The $34 billion in long positions is them using ETFs like everyone else — as a way to get quick and convenient exposure to a particular market. For example, the world’s largest hedge fund, Bridgewater Associates, has a $4 billion position in the Vanguard FTSE Emerging Markets ETF (VWO), which it has held for six years now.  There’s also Paulson & Co.’s famous $1 billion position in SPDR Gold Trust (GLD), which it has been holding for almost seven years. Like anyone else, they like the cheap exposure and liquidity VWO and GLD serve up.

With that context in place, yes, there are a tiny minority of hedge funds that engage in some complex trades like the ones highlighted in the article. But each trade comes with at least one big problem.

Before anyone tries any of these at home, it’s important to deconstruct them.

Trade #1: Robbing Grandma

How it works: During a major selloff, try and scoop up shares at discounted prices put in by small investors using market orders.

The problem: It’s super rare. Aug. 24, which saw hundreds of ETFs trade at sharp discounts amid a major selloff, was basically an anomaly. At best, a day like that happens once every two years. Thus, to capitalize on discounts of the 20-30 percent variety is like standing on a beach waiting for a hurricane to hit. And you won’t be the only one, so you may wait two years only to find you can’t get your order filled on the day the big one hits. In addition, no large institutional investors are putting in market orders. So this low-hanging fruit is sell orders for tiny amounts put in by unknowing small investors. Essentially this is the white-collar equivalent of robbing Grandma for some loose change in her purse.

Moreover, Aug. 24 may never happen again, at least the way it unfolded. ETF issuers are working with the exchanges, the regulators, and the market makers — and even making significant recommendations — to make sure those kinds of small investors aren’t exposed again like that.

It should be noted, though, that arbitrage between the ETF price and the value of the holdings happens day in and day out with ETFs — that’s how ETFs work. They rely on a network of market makers and authorized participants to arbitrage away the discrepancy between the ETF’s underlyings and its net asset value (NAV).

Trade #2: The Double Short

To continue reading the straight scoop from Bloomberg columnist Eric Balchunas, click here

ETFs To Watch This Week Include ETFs Involved In Oil and The Yen

MarketsMuse blog update highlights the must watch ETFs for the first week of June. The ETFs range from health care, to oil, the Japanese Yen. This update is courtesy of the Benzinga’s author, David Fabian, and his article, “Healthcare, Yen And Oil ETFs To Watch This Week“, with an excerpt from the article below.

The summer months are often characterized by lower volume and heightened volatility, which seems to be a trend that has already established itself this year.

Several important events this week have the potential to impact the market including: personal spending, motor vehicle sales and non-farm payroll data.

Here are the key ETFs to watch for the week of June 1:

Health Care Select Sector SPDR XLV 0.25%

Healthcare stocks have continued to show tremendous strength this year and XLV has been one of the leading sector components of the S&P 500 Index. This ETF is made up of 57 large-cap stocks in the pharmaceutical, biotechnology and medical services fields. Top holdings include well-known companies such as Johnson & Johnson JNJ 1% and Pfizer Inc PFE 0.9%.

CurrencyShares Japanese Yen Trust FXY 0.1%

After appearing to stabilize through the first four months of the year, the Japanese yen currency has once again plunged markedly lower versus the U.S. dollar in May. FXY tracks the daily price movement of the yen versus the U.S. dollar and is down 3.64 percent so far this year.

United States Oil Fund LP (ETF) USO 3.83%

Crude oil prices jumped 4 percent on Friday and managed to recoup the majority of the slide this commodity experienced in May. USO tracks the daily price movement of West Texas Intermediate Light Sweet Crude Oil futures and is the most heavily traded oil ETF.

To continue reading about why oil, the yen, and health care are must watch ETF categories according Benzinga reporter, David Fabian, click here.

 

Healthcare ETFs–Free Prescriptions Here…

seekingalphalogobenzinga-logo   Courtesy of “The ETF Professor”–his work appears courtesy of Benzinga.com, and is also re-distributed through leading publishers

Conservative investors and risk-takers alike have been rewarded for owning U.S. health care stocks and ETFs focusing on those names in recent years.

The data supports that assertion. A look at three major health care ETFs, all of which do things a little bit differently, shows significant out-performance of the S&P 500 over various time frames.

For example, the Health Care Select SPDR (NYSE: XLV) is up 30.3 percent in the past five years compared to 12.3 percent for the S&P 500.

Since December 2011 when it became a Market Vectors fund, Market Vectors Pharmaceutical ETF is up almost 20 percent. The iShares Nasdaq Biotechnology ETF (NASDAQ: IBB) has nearly doubled in the past five years.

Bottom line: Investors have done well when staying at home with U.S. health care stocks, but that does not mean there are not global opportunities worth considering. After all, some of the biggest health care companies in the world are not U.S. firms.

France’s Sanofi (NYSE: SNY) and Israel’s Teva Pharmaceuticals (NASDAQ: TEVA) stand as just two examples.

Here is a look at some international developed market health care ETFs to see if going global with this sector is a better idea than staying domestic.

Read more: http://www.benzinga.com/trading-ideas/long-ideas/13/02/3357973/are-global-health-care-etfs-worth-prescribing#ixzz2LfCheYiO

 

ETFs & Obamacare: The Broccoli ETF

“If Congress can force me to buy health insurance, can it also force me to eat broccoli?”…

That question, according to WallachBeth Capital’s Chris Hempstead, is one that he can’t answer, but Hempstead does have a sharp-as-a-scalpel perspective re: the ETFs to put under a microscope as the US Supreme Court is scheduled to perform surgery on President Obama’s healthcare initiative:

IHF: IShares DJ US Healthcare Providers (77% Healthcare Services and 17% Pharma)

Year to date the IHF fund is +11.6% and since Obamacare passed +24% versus SPX of 12.6% and 20% respectively.

PTH: PowerShares Dynamic Healthcare Sector (25% Pharma, 25% Healthcare Products, 24% Healthcare Services and 14% Biotech)

YTD the PTH fund is +12.6% (SPX 12.6%) and since Obamacare +28% (SPX 20%).

FXH: First Trust Health Care AlphaDEX (30% Pharma, 30% Healthcare Services, 24% Healthcare Products and 12% Biotech)

YTD the FXH fund is +13% (SPX 12.6%) and since Obamacare +29% (SPX 20%).

YTD  XLV is +7.9% (SPX 12.6%) and since Obamacare +16% (SPX 20%).  XLV has an expense ratio of .18%.

 

Expert ETF Trader: Liquidity Is There; Just Look Beyond the Screens

Other than the ETF market “go-go names”, one of the more commonly-voiced, and according to many, often-misguided observations regarding most ETFs is  “won’t trade it, there’s no liquidity in that name,”  or “the screens are only showing 1000 shares offered and I have to pay up 50 cents to buy a lousy 25,000 shares?!”

As a consequence, any half-smart portfolio manager often quickly (if not wrongly) concludes that the “lack of liquidity cost” is a deterrent to their positioning what is otherwise a very compelling “basket” of underlying securities.

The editors here don’t buy into the lack of liquidity notion, and after getting our hands on desk notes published today by Chris Hempstead, Head ETF Trader for WallachBeth Capital (one of the more prominent players in the ETF space), we couldn’t resist the opportunity to re-publish.

But wait, there’s more!