Tag Archives: fund

Proposed SEC Rules Could Shake Leveraged ETFs

Leveraged ETFs have been investors’ darlings this year thanks to stock market volatility. This is because these funds try to magnify returns of the underlying index with the leverage factor of 2x or 3x on a daily basis by employing various investment strategies such as swaps, futures contracts and other derivative instruments (read: 10 Most Heavily Traded Leveraged ETFs YTD ). Due to the compounding effect, investors can enjoy higher returns in a very short period of time provided the trend remains a friend. However, these funds are extremely volatile and are suitable only for traders and those with high risk tolerance. These run the risk of huge losses compared to traditional funds in fluctuating or seesawing markets. Further, their performances could vary significantly from the actual performance of their underlying index over a longer period when compared to a shorter period (such as, weeks or months). Despite this drawback, investors have been jumping into these products for quick turns. Will these allure continue in the months ahead if the new rules proposed by the SEC are enacted? Inside the New Proposed Rules Under the proposed rules , the fund has to limit its notional exposure to derivatives of up to 150% of the net assets or 300% if the fund actually offers lower market risk. Additionally, it should manage the risks associated with derivatives by segregating certain assets (generally cash and cash equivalents) equal to the sum of two amounts: Mark-to-Market Coverage Amount: A fund would be required to segregate assets equal to the amount that the fund would pay if the fund exited the derivatives transaction at the time of determination. Risk-Based Coverage Amount: A fund would also be required to segregate an additional risk-based coverage amount representing a reasonable estimate of the potential amount the fund would pay if the fund exited the derivatives transaction under stressed conditions. Apart from these, the fund would implement a formalized derivatives risk management program administered by a risk manager. ETF Impact These rules, if enacted, would shake the leveraged ETF world, in particular the triple leveraged funds. This is because the funds might be forced to increase exposure to low risk and low-return safe assets like cash and equivalents in order to offset the risk of derivatives exposure. This could eat away the outsized returns that the leveraged ETFs have been providing to investors (see: all Leveraged Equity ETFs here ). Notably, there are 135 leveraged products and 87 leveraged inverse products as per xtf.com. Of these, 46 leveraged and 36 leveraged inverse products have three times exposure to the underlying index and would be the most in trouble. In particular, the proposed rules would hurt the leveraged long and short ETFs structured via the Investment Company Act of 1940, potentially forcing providers to change the legal structure or leverage factor, or to close them. Notably, Direxion and ProShares are the two issuers that would be the most impacted as they have several equity and fixed income ETFs that rely on three times derivatives-based leverage and has been structured via the Investment Company Act of 1940. Some of the most popular ones are the ProShares UltraPro QQQ ETF (NASDAQ: TQQQ ) , the Direxion Daily Financial Bull 3x Shares ETF (NYSEARCA: FAS ) , the ProShares UltraPro S&P 500 ETF (NYSEARCA: UPRO ) , the Direxion Daily Small Cap Bull 3x Shares ETF (NYSEARCA: TNA ) , the Direxion Daily 20+ Year Treasury Bear 3x Shares ETF (NYSEARCA: TMV ) , the ProShares UltraPro Short S&P 500 ETF (NYSEARCA: SPXU ) , the Direxion Daily Small Cap Bear 3x Shares ETF (NYSEARCA: TZA ) and the ProShares UltraPro Short QQQ ETF (NASDAQ: SQQQ ) . However, some commodity leveraged ETFs providing investors’ triple exposure to the index could escape the new rules by virtue of their registration as commodity pools with the Commodity Futures Trading Commission (CFTC). In Conclusion While the SEC proposal is a concern for leveraged ETF providers, it is not yet finalized or may fall apart. Even if the rules are adopted, it will take months or a year to have a full impact on the ETF world. Link to the original post on Zacks.com

Natixis And AlphaSimplex Launch Dynamic Allocation Fund

By DailyAlts Staff On November 30, Natixis Global Asset Management added its tenth alternative mutual fund to its lineup: the Natixis ASG Dynamic Allocation Fund (MUTF: DAAFX ). The new fund is the firm’s fourth fund sub-advised by affiliate AlphaSimplex Group, which was founded by MIT finance professor Andrew Lo, PhD. The new fund seeks to deliver long-term capital appreciation, with a secondary goal of capital-preservation during unfavorable market conditions, via a “tactical global asset allocation strategy.” “Building a durable investment portfolio has become even more challenging in a volatile market environment buffeted by global economic uncertainty,” said David Giunta, president and CEO of U.S. Distribution for Natixis, in a recent statement announcing the launch of the new fund. “To successfully diversify a portfolio of traditional stock and bond funds, investors need adaptive tools, such as the ASG Dynamic Allocation Fund, which incorporate a wide range of information available today to make investment decisions.” Investment Approach The ASG Dynamic Allocation Fund employs dynamic tactical allocation across global markets and asset classes through the use of futures, forwards, and ETFs. Its long positions will span the following traditional asset classes: U.S. stocks; Non-U.S. developed market stocks; Emerging markets stocks; U.S. bonds; and Non-U.S. developed market bonds. The prospectus for the fund indicates that commodities will be added in the future, which will be limited to 20% of the fund’s assets. The strategy starts with a balanced allocation to “high-risk” and “low-risk” asset classes, and then adjusts the allocations according to AlphaSimplex’s quantitative analysis of market behaviors. Portfolio managers Alexander Healy, Robert Rickard, and Derek Schug are also charged with the task of managing the fund’s annualized volatility, which is targeted at no more than 20%, as measured by the standard deviation of the fund’s returns. The fund will also use leverage, which will not exceed 200% of assets, and may hold short positions through the use of derivatives. The fund’s portfolio construction process is depicted in the graphic below. “The ASG Dynamic Allocation Fund seeks to balance risk with expected return by tactically allocating to multiple asset classes across a range of global markets using a disciplined quantitative approach that draws on AlphaSimplex’s current strategies and our experience managing liquid alternatives since 2003,” said AlphaSimplex CEO Duncan B. E. Wilkinson. “We created the fund to help investors shift exposures among global assets in a fast-paced global market environment and help them stay invested over the long term.” Fund Details Shares of the fund are available in A (DAAFX), C (MUTF: DACFX ), and Y (MUTF: DAYFX ) classes, all with an investment management fee of 0.70% and respective net-expense ratios of 1.25%, 2.00%, and 1.00%. The minimum initial investment for A and C shares is $2,500. The minimum for Y shares is $100,000. For more information, visit the fund’s web page .

Even After Recent Drop, PGP Is A Sell

PGP trades at a large premium, putting it at risk for a steep decline. When rates rise, high premium and highly leveraged funds will suffer. Friday’s drop is a sign of how risky the fund truly is. The purpose of this article is to evaluate PIMCO Global StocksPLUS & Income Fund (NYSE: PGP ) as an investment option. To do so, I will evaluate the fund’s characteristics, recent performance, and trends within the industry as a whole to attempt to determine if PGP will be a profitable investment going in to 2016. First, a little about PGP. PGP’s stated objective is to seek a total return comprised of current income, current gains, and long-term capital appreciation. The fund attempts to achieve this objective by building a global equity and debt portfolio and investing at least 80% of the fund’s net assets in a combination of securities and instruments that provide exposure to stocks and/or produce income and by utilizing call and put options to generate gains from options premiums and protect against swift market declines. Currently, the fund is trading at $16.91/share, after Friday’s decline of 8.62%. The fund pays a monthly dividend of $.18/share, which translates to an annual yield of 12.77%. While the fund has come under pressure over the past few trading sessions, performance in the past few months has been strong, with the fund up almost 15% in the past three months, excluding dividend payments. Given that performance, and its high yield in this low rate environment, PGP may seem like a sound investment. However, there are a few reasons, which I will outline below, why I would avoid PGP going forward. First, and probably most important, PGP trades at an enormous premium to Net Asset Value (NYSE: NAV ), currently at 56.24%. This in and of itself is a red flag for any fund, as it indicates investors are paying well above the fair market rate for future performance. PGP has been able to maintain this high premium because it has a history of reliability for its dividend payout, which is high, and investors have flocked to PGP and other similar funds to earn this yield while interest rates have remained at record lows. While this strategy may have paid off during that environment, once rates start to rise, investors will shift out of riskier funds and in to safer asset classes that will begin to pay more. Funds that demand a high premium, such as PGP, will be most at risk. This was evident during Friday’s drop, as credit markets were rattled over Third Avenue’s decision to suspend redemptions on one of its credit mutual funds. This decision hit many Pimco funds hard on Friday, but funds that trade at large premiums were hit the hardest. For example, PHK, which also trades at a premium (albeit at only 10%) dropped over 7%, which was similar to PGP’s drop. Meanwhile , PCN, which trades at a 7.62% discount to NAV, dropped only 2.44% and PCI, which trades at an almost 16% discount to NAV , dropped only 1.18%. While this is just a snapshot of one trading day, it demonstrates how funds with high premiums are more sensitive to market swings and are riskier for the initial principle investment. Second, interest rates are likely to increase this week, as 92% of economists surveyed by the Wall Street Journal are predicting a December rate hike to be announced during the Fed’s meeting this week. If Yellen announces a hike, and lays out the groundwork for future hikes in 2016, investors may begin to exit riskier funds like PGP, as yield on safer investments, such as Treasury bills, will begin to be higher. Again, due to its large premium, PGP will probably suffer more than most and the drop could be steep. In the past month, as expectations for the first rate increase became more pronounced, PGP has suffered, down about 5% (excluding dividends). With the rate hike becoming more evident, I expect this decline to continue. Third, while PGP has traded at an ultra-high premium for quite some time, historically the fund has traded at NAV, or at a discount. It wasn’t until the depths of the of the financial crisis and the near zero interest rates in 2009 that PGP began to sell at a premium. Investors have irrationally bid up this fund to the point where owning it now sets up the investor for a very quick, steep drop in principle. When rates rise, I expect PGP to return to pre-recession valuations, which would mean a dramatic decrease in share price from where it stands today. Of course, avoiding PGP has risks of its own. The fund has traded at a premium successfully for years, and its high yield, along with capital appreciation, has rewarded investors handsomely. If Yellen announces that the Fed will yet again delay raising rates, or lays out a dovish stance for future increases in 2016, funds like PGP could rally, as that could indicate the low rate environment will be around for longer than anticipated. Additionally, PGP’s yield of almost 13% could be enough to entice investors to stay the course throughout 2016, even with rising rates. While rates rising seems to be an almost certainty, those rates will most likely still be at historically low levels. Investors may decide that the high yield and below investment grade credit sectors that compose PGP could be worth the risk. However, I expect the Fed to follow through with the December rate hike, and lay a groundwork for a few rate hikes in 2016. This albeit slow rate of increases will gradually steer investors out of high-yielding closed-end funds, and PGP should fall quicker than others. Bottom-line: PGP has paid a reliable, high-yield during a period of ultra-low interest rates, rewarding investors with high income during a time when such income was hard to come by. The fund has also performed strongly from its 2009 lows, more than doubling in share price. However, this performance has priced PGP well above NAV, and has shown itself prone to dramatic losses when the market gets rattled, such as on Friday. With volatility expected in the credit markets in the coming months as interest rates are set to rise, the risk-reward of PGP is just not there. While the yield is high, and PGP has proven to pay it reliably, there are other Pimco funds available with similar yields, that won’t expose investors to such a large potential loss in principle. Heading in to the new year, I would caution investors away from PGP at this time.