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Trying To Hedge 7-10 Bond Yields? Consider TBX

Summary TBX provides a well correlated hedge for intermediate treasury bonds. TBX is associated with significant risks and is intended for achieving short term goals. Recommended for investors who believe interest rates will rise dramatically over an intermediate time frame. Basic Information The ProShares Short 7-10 Year Treasury ETF (NYSEARCA: TBX ) is a n exchange traded note (ETN). ETN’s are unsecured, unsubordinated debt securities. This type of debt security differs from other types of bonds and notes because ETN returns are based upon the performance of a market index minus applicable fees, no period coupon payments are distributed and no principal protections exist. TBX is intended to move inversely (-1x) to the 7-10 year Barclay’s Bond Index. The Barclay’s Bond Index is tied to U.S. treasury yields. TBX seeks investment results for a single day only, not for longer periods. A “single day” is measured from the time the Fund calculates its net asset value (“NAV”) to the time of the Fund’s next NAV calculation. The return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from the inverse (-1x) of the return of the Barclays U.S. 7-10 Year Treasury Bond Index (the “Index”) for that period. For periods longer than a single day, the Fund will lose money when the level of the Index is flat, and it is possible that the Fund will lose money even if the level of the Index falls. Longer holding periods, higher index volatility, and inverse exposure each exacerbate the impact of compounding on an investor’s returns. During periods of higher Index volatility, the volatility of the Index may affect the Fund’s return as much as or more than the return of the Index. Expense Ratio: .95% + Portfolio turnover (currently 0% because cash instrument and derivative transactions are not included). How Could it be used? If you are looking for a 10-year hedge, TBX could be a very good play. It is highly correlated to the market and is a useful tool for any skilled investor. I cover a multitude of reasons in this article to illuminate the risks of investing in an ETN, but with adequate forethought TBX is not a bad strategy, especially with the threat of rising interest rates. Principal Investment Strategy All investment strategies are used in combination to achieve similar daily return characteristics as -1x of the index: Derivatives – financial instruments whose value is derived from the value of an underlying asset or assets, such as stocks, bond, funds, interest rates, or indexes. Swap agreements – Contracts entered into primarily with major global financial institutions for a specified period ranging from a day to more than one year. In a standard “swap” transaction, two parties agree to exchange the return (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross return to be exchanged or “swapped” between the parties is calculated with respect to a “notional amount,” e.g., the return on or change in value of a particular dollar amount invested in a “basket” of securities or an ETF representing a particular index. Futures Contracts – Standardized contracts traded on, or subject to the rules of, an exchange that call for the future delivery of a specified quantity and type of asset at a specified time and place or, alternatively, may call for cash settlement. Money Market Instruments U.S. Treasury Bills – that have maturities of one year or less and supported by full faith and credit of the U.S. government. Repurchase Agreements – Contracts in which a seller of securities, usually U.S. government securities or other money market instruments, agrees to buy them back at a specified time and price. Repurchase agreements are primarily used by the Fund as a short-term investment vehicle for cash positions. These are the Principal Risks associated with TBX Risks Associated with the Use of Derivatives Compounding Risk Correlation Risk Fixed Income and Market Risk Counterparty Risk Debt Instrument Risk Interest Rate Risk Intraday Price Performance Risk Inverse Correlation Risk Liquidity Risk Early Close/Late Close/Trading Halt Risk Market Price Variance Risk Valuation Risk Non-Diversification Risk Portfolio Turnover Risk Short Sale Exposure Risk As you can see below, estimated returns are volatile, and the funds actual results may be significantly better or worse than the underlying index. Bolded values, not including the x and y axis percentages, are where the fund performed worse than expected. This is meant to illuminate the possibility of under or over performance. Estimated Fund Returns Index Performance One Year Volatility Rate One Year Index Inverse (-1x) of the One Year Index 10% 25% 50% 75% 100% -60% 60% 147.50% 134.90 94.70 42.40 (8.00) -50% 50% 98.00 87.90 55.80 14.00 (26.40) -40% 40% 65.00 56.60 29.80 (5.00) (38.70) -30% 30% 41.40 34.20 11.30 (18.60) (47.40) -20% 20% 23.80 17.40 (2.60) (28.80) (54.00) -10% 10% 10.00 4.40 (13.50) (36.70) (59.10) 0% 0% (1.00) (6.10) (22.10) (43.00) (63.20) 10% -10% (10.00) (14.60) (29.20) (48.20) (66.60) 20% -20% (17.50) (21.70) (35.10) (52.50) (69.30) 30% -30% (13.80) (27.70) (10.10) (56.20) (71.70) 40% -40% (29.30) (32.90) (44.40) (59.30) (73.70) 50% -50% (34.00) (37.40) (48.10) (62.00) (75.50) 60% -60% (38.10) (41.30) (51.30) (64.40) (77.00) Correlation to 7-10 year yields I aligned TBX with its foil the iShares 7-10 Year Treasury Bond ETF ( IEF). IEF seeks to track the investment results of an index composed of U.S. Treasury bonds with maturities between seven and ten years. IEF is comprised entirely of intermediate government bonds. It is essentially perfectly correlated to the Barclays U.S. 7-10 Year Treasury Bond Index. If IEF moving up in value it is likely overall interest rates are falling due to the nature of the bond. If IEF is moving down in value it is likely overall interest rates are rising. Due to the inverse relationship of IEF and TBX, TBX provides a hedge for 7-10 year bonds. Conclusion If you are trying to hedge your investment on intermediate treasury yields then TBX is probably an ETN you ought to consider. However, it is important for any smart investor to weigh the risks associated with any ETN before jumping into any investment long or short. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Applying A Dual Momentum Model To The IVY 10 Portfolio

Long only, ETF investing, portfolio strategy, momentum “}); $$(‘#article_top_info .info_content div’)[0].insert({bottom: $(‘mover’)}); } $(‘article_top_info’).addClassName(test_version); } SeekingAlpha.Initializer.onDOMLoad(function(){ setEvents();}); How to enhancing a Buy and Hold strategy with Dual Momentum Model. Reduce volatility and portfolio draw-down with an ETF cutoff model. How to apply both absolute and relative momentum to portfolio management. How to triple portfolio returns over a stock-bond index fund. Beginning with the ten (10) ETFs identified in Mebane T. Faber and Eric W. Richardson’s book, The Ivy Portfolio , the following analysis shows how the IVY portfolio would have performed from June 30, 2006 through 6/11/2015 when a momentum model is applied to these ETFs. The ETFs using in this analysis are the IVY 10 plus SHY , our cutoff or “circuit breaker” ETF. Here is the portfolio strategy used with the IVY 10. Rank the ETFs as shown in the following table. Review period is every 33 days. This moves the review or update throughout the month, thus avoiding short-term trading fees, wash rule, and end of month mutual fund window dressing. Look-back periods are 87 days with a 30% weight, 145 days with a 50% weight, and 20% assigned to a 14-day mean-variance volatility setting. ETFs performing below SHY using this ranking system are sold out of the portfolio. Select the top two performing ETFs and invest equal percentages in each. If there is a tie, invest in equal amounts in the three or four top performing ETFs. The absolute momentum model identifies ETFs that are ranked above SHY. The ranking model identifies the relative momentum between the various ETFs. IVY 10 ETF Rankings: The following table (generated from spreadsheet) shows both the absolute and relative momentum for the 10 IVY ETFs. The following table includes 6/11/2015 data. GSG and VB are the top two performing ETFs based on the three metrics used to come up with these rankings. If one were to follow this model today, we would invest equal dollars in GSG and VB. (click to enlarge) IVY 10 Back-Test Results: How has this investing model worked since June 2006? The following graph shows a Monte Carlo calculation where the dark black line is the average performance of the IVY 10. The red line is the performance of our stock-bond benchmark, VTTVX . Note the light gray lines as they show other probabilities or noise around the review days. In reality, investors are likely to make trades from 2 days before the review period to as many as 5 days after the review period. Call this trading noise. Even the worst light gray line outperforms the VTTVX benchmark. Here are a few salient points when Dual Momentum is applied to the IVY or Faber 10. Portfolio return = 240% vs. 77% for the VTTVX index fund. Maximum draw-down (DD) for portfolio is 27% vs. 45% for VTTVX. Average annual DD for portfolio is 14% or under 15%, what might be considered an acceptable level. Average Compound Annual Growth Rate (CAGR) = 14.7%. Trades per review period = 1.7. Tax considerations may dictate one use this model only with tax-deferred accounts. (click to enlarge) Disclaimer: After running hundreds of back-tests using similar models to what is described above, there is still a considerable amount of luck when it comes to the day in which a particular ETF is purchased. The “trading noise” analysis helps to temper this problem, but it is still there. Also, the above model does not account for remaining cash that is left lying around due to dividends and money not invested due to share rounding. Taxes are also an issue as mentioned above. Investors in the 28% tax bracket need to add something close to 2% annually to overcome the difference between short and long-term capital gain taxes. Each investor should take their own tax situation into consideration. Disclosure: The author is long VTI,VEA. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Back-testing analysis was run by interested investor. Share this article with a colleague

Greek Debt Concerns Put GREK In Focus

Investors have been worried over the debt negotiations between Greece and its creditors this year. This also had a negative impact on the major benchmarks. Recently, Greek Prime Minister Alexis Tsipras submitted fresh proposals before its creditors to settle the debt crisis. Meanwhile, Greece failed to repay a debt of around $338.7 million to the International Monetary Fund (IMF) and decided to bundle four June payments into one, to be paid on June 30. Separately, Tsipras is looking for support from his Syriza party on this matter. However, the situation is not in his favor at this moment. Several members wanted a re-election if Tsipras lets the creditors have their say. “Realistic” Proposals New proposals are reported to consist of concessions on stricter austerity targets. Reportedly, it includes a hike in the VAT (value added tax) rate, among other financing options that will buy Greece time to strike a deal next March. It was also reported that the finance minister Yanis Varoufakis came up with an idea to transfer the debt held by the European Central Bank (ECB) to the European Stability Mechanism, Eurozone’s crisis-fighting fund. After submitting these proposals, Tsipras said he believes that Greece will be able to strike an agreement regarding debt negotiations in the near future. Though it was reported that the creditors may consider extending the country’s bailout program till the end of March 2016, creditors sounded not so optimistic about the proposals. It was reported that the creditors, including IMF, may consider the extension if Athens implements measures including pension cuts, tax increases, and other policies. Will ‘Grexit’ Happen? It is speculated that nobody wants the nation to exit the common currency bloc and thus Greece is poised to play “the game for as long as they can.” Grexit may lead to instability in the currency union, which other members of the EU would like to avoid. In this scenario, the “Grexit” prospect seems unlikely. Meanwhile, German Chancellor Angela Merkel and French President François Hollande agreed to meet Greek Prime Minister Alexis Tsipras on the sidelines of a Brussels summit to defuse the standoff between Greece and its creditors over the country’s bailout program. Moreover, the European Central Bank increased the amount Greek banks can borrow from their central bank to $94.1 billion, the highest increase since Feb 18. Separately, the New York Times’ Paul Krugman pointed out that Greece has already done a large volume of adjustments, the cost of which is so huge that the country should have been in a better position if it had exited the euro in 2010. He noted: “You can make an even better case that Greece would have been much better off if it had never joined in the first place. But at this point these are sunk costs. If Greece can negotiate a halfway reasonable compromise, one that more or less pauses further austerity, it’s hard to see that the risks of exit would be worth it.” GREK in Focus Several investors are hoping that the country will reach a deal with its creditors soon. Wilbur Ross, who along with a group of investors, has $1.47 billion riding on Eurobank Ergasias, the third largest bank in Greece, remained optimistic about the situation. Regarding the investment environment in Greece, Ross said that the dismal situation might take a swift turn in the near future “if the brinkmanship on display between Athens and the creditors ends in a credible deal that restores the confidence of foreign investors.” In this scenario, the Greek ETF – Global X FTSE Greece 20 ETF (NYSEARCA: GREK ) – will remain on investors’ radar till a potential deal is struck between Greece and its creditors. The ETF tracks the FTSE/ATHEX Custom Capped Index that is designed to reflect the performance of the 20 largest securities listed on the Athens Stock Exchange. The product holds 22 stocks in the basket and is heavily concentrated in the top 5 holdings that make up for a combined 55.4% of assets. The ETF has around $308.8 million in its asset base and sees a moderate trading volume of more than 800,000. The fund charges 55 bps in annual fees from investors and has a dividend yield of 1.1%. GREK has a Zacks Rank #3 (Hold) with a High risk outlook. The fund lost? 10.3% in the year-to-date frame and declined nearly 1% in the trailing one month. Original Post