Tag Archives: onload

Investors Are Scared – Getting Long Volatility Again

Last week I offered up a playbook for volatility for this year. Since that time I’ve shorted volatility and subsequently gotten long. I’ll continue to use a hedged position selling calls against the VXX until the volatility outlook changes. Last week I wrote a piece regarding volatility in the new year and my playbook for how to survive the strong moves up and down in volatility as measure by the short term VIX ETF (NYSEARCA: VXX ). At the time I had no positions as I was waiting for a more definitive move up or down in order to stake my claim on the VXX. I wrote I wanted to see a bigger move up before shorting and since the time the article was published, VXX has moved sharply to the upside to trade near $35 as I write this. So what have I done since the last article and what am I doing going forward? After being out of the VXX for a couple of weeks I actually decided to get short volatility after another move up following my article. I used the inverse short term VIX (NASDAQ: XIV ) ETF to do so to try and capture a move down in the VXX. I went long XIV on the 7th and captured a very nice move down in volatility only to have it reversed on Monday the 12th. After seeing the move down in volatility was short lived I closed my XIV position for a very small gain (after riding the XIV up and back down) and went long VXX again. Why did I go long? There is a lot of stuff going on in the financial world. Oil and other commodities continue to signal that a recession is coming, Greece is once again on the verge of breaking up the Euro and here at home, the market hangs on the Fed’s every word in terms of any potential volatility that could be introduced from the central bank raising rates and pulling stimulus. These factors make me think the likely move in volatility is up in the short term, not down. I’m currently long VXX while selling calls against my position. I did this for two reasons. First, in case I’m wrong, VXX can move down in a hurry and crush you. This is the same problem the short volatility ETFs have and that’s why I trade in and out so much and why you’ve got to be careful. The calls give me some cushion on the downside in exchange for taking away my upside in case volatility collapses. Second, I sold the calls simply because premiums are huge. Slightly out of the money calls can be sold for 5% of the ETFs price – for an option that expires in a week. Think about that one; that kind of yield for five or six trading days is unbelievable and it provides not only huge amounts of cash for your portfolio but a nice bit of protection to the downside. I went long VXX at $33.30 and sold weekly 33 calls against my position for $1.46, expiring four days after I sold them. Given the move up in the VXX to $34.40, I’ve given some upside away but I’m still collecting the huge premium in the meantime, offering 3.5% yield and some downside protection as I sold in the money calls. Given the outlook for continued volatility I think the best course of action going forward is hedged bets in the VXX. Last October and again in December of last year I went long the inverse VXX ETF (NYSEARCA: SVXY ) or the VXX itself with no protection as the situation warranted because I felt strongly I could predict what volatility was doing. But given all of the places we can expect news from in the short term, I don’t feel confident enough to just buy VXX or XIV. I like the covered call play on VXX right now but if VXX spikes to the high $30s, as I said in my last article, I’ll look at doing the same think with XIV. But for now, I’m long VXX until something changes and when it does, I’ll be sure to let you know. Additional disclosure: I’m long VXX hedged with short calls but may trade out of this position at any time.

Hedged ETFs Provide Foreign Exposure Sans Currency Risk

By DailyAlts Staff A new whitepaper from Deutsche Asset & Wealth Management (Deutsche AWM) considers the benefits of using currency-hedged ETFs (exchange-traded funds) to gain foreign equity exposure. Written by Deutsche AWM ETF strategists Dodd Kittsley and Abby Woddham, the paper explores the growth of investor interest in foreign stocks and the ETFs that hold them, as well as considering the potential “currency risk” of holding unhedged foreign equities. Foreign Investment Difficulties Investing in foreign stocks has been difficult historically for a variety of reasons. First and foremost, most foreign stocks trade on foreign exchanges, and domestic investors inherently have reduced access to foreign exchanges. Furthermore, stocks trading on foreign exchanges are priced in foreign currencies, creating an intermediary requirement (and hassle) for U.S. investors to first exchange dollars for foreign currencies, and also creating the phenomenon of “currency risk” – the risk that exchange rates between the dollar and the foreign currency will change during the holding period of the foreign stock. Overcoming Those Difficulties Over time, these difficulties have been addressed one by one. First, the number of foreign stocks trading on U.S. exchanges has increased steadily over time, including Alibaba’s record-breaking IPO last year. Secondly, U.S. investor access to foreign exchange markets has increased – but even more significantly, the rise of ETFs that hold stocks trading on foreign exchanges has greatly expanded investor access to such stocks. Indeed, the low cost, tax efficiency, liquidity, and transparency of ETFs has made them perhaps the most popular means of gaining foreign equity exposure. But for “unhedged” foreign stock ETFs, the phenomenon of currency risk remains – and it can have a devastating impact on an investment’s results. An Example of Currency Risk Deutsche AWM’s whitepaper offers the following example as evidence: Imagine you wanted to buy $150,000 of a stock trading on a German exchange, with the stock’s shares priced in euros. Suppose the exchange rate at the time of the purchase was $1.50 to 1 euro, and therefore $150,000 would buy 100,000 euros worth. Now imagine that a year later, the stock price is flat, and you therefore still have 100,000 euros worth of shares – but unfortunately, the dollar has strengthened against the euro so that $1 equals 1 euro. In this case, your 100,000 euros worth of stock, that you paid $150,000 for a year earlier, would now be worth just $100,000. Due to currency risk, an investment that would have resulted in a breakeven return became a 33% loss. This is illustrated below: (click to enlarge) How Currency Hedging Works In response, ETF providers have developed “currency-hedged” products. These ETFs hold shares of stocks priced in foreign currencies, but they use forward currency contracts to “hedge” against currency risk. This is done by agreeing to sell the foreign currency at the current exchange rate sometime in the future – if, in the example above, you would have agreed to sell 100,000 euros for $150,000 one year in the future at the same moment you bought 100,000 euros worth of stock; then a year later, your stock would still be flat at 100,000 euros, but instead of losing 33% to currency fluctuations, your forward contract would offset that loss with a 33% gain. You could sell your shares for 100,000 euros, but instead of exchanging them for $100,000 at the current exchange rate, your forward contract would entitle you to sell them for $150,000. Conclusion The authors of Deutsche AWM’s paper point out that currency risk is a blade that can cut both ways: Japanese stocks were up 54.6% in 2013 when priced in yen, but only 27.2% when priced in dollars due to the dollar strengthening against the yen that year. But when Japanese stocks only gained 0.6% in 2010 priced in yen, they gained 15.4% that same year priced in dollars due to the yen’s strengthening against the dollar that year. Since exchange-rate changes can have either positive or negative impacts on an investment’s value, the whitepaper’s authors suggest strategically choosing “to hedge or not hedge” based on the outlook for the particular currencies involved. But with the dollar widely expected to strengthen in 2015 as the Federal Reserve begins raising interest rates, currency-hedged ETFs may be particularly worth the consideration of investors seeking exposure to foreign stocks. For more information, download a pdf copy of the whitepaper .

Lack Of U.S. Wage Growth Puts These ETFs In Focus

The U.S. is creating jobs fast, but is slow in boosting wage growth. While the buzz about poor wage growth has been doing rounds for long, the unexpected and steepest fall in average U.S. hourly wage for December since 2006 cast a dark cloud over the country’s economic growth story. Average hourly earnings dipped 0.2% sequentially in December, and November average hourly earnings were adjusted down to a 0.2% increase. On a year-over-year basis, average hourly earnings in December were up 1.7%. This indicates that the brighter overall job picture was courtesy of the low-wage category. Thanks to this downbeat data, positive sentiments that shaped up over the U.S. investing in last few months, suffered a brief (seemingly) setback to start 2015. The U.S. dollar dipped against the yen, though slightly, following not-so-enthusiastic payrolls. Several emerging market currencies, however, including Taiwan’s dollar and Indonesia’s rupiah had witnessed a notable ascent following the payroll data. The WisdomTree Emerging Currency ETF ( CEW) , which provides a diversified play on emerging market currencies, added 0.24% on January 9th. Added to this is the inflationary outlook, which will likely remain grave in the days to come due to the unending oil rout. In fact, a beneficial driver like lower greenback also failed to perk up oil investing. Bloomberg analysts envisaged that U.S. consumer prices possibly grew 0.7% year over year in December, the five-year lowest. Most of the market participants started to believe that a solemn inflationary picture and a lackluster wage scenario will delay the hike in U.S. interest rates. We expect this shaky investor sentiment to take charge of the market movement at least for a few days. An upbeat economic data report is urgently needed to lift investors’ mood which is already sinking due to global growth worries. Greenback Gives Up Given the change in the market fundamentals and slide in the greenback following the latest wage data, investors might think about shorting U.S. dollars to take advantage. PowerShares DB U.S. Dollar Bearish Fund (NYSEARCA: UDN ) This fund could be the prime beneficiary of the falling USD as it offers exposure against a basket of world currencies. These include the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. This is done by tracking the Deutsche Bank Short U.S. Dollar Index Futures Index Excess Return plus the interest income from the fund’s holdings of U.S. Treasury securities. In terms of holdings, UDN allocates nearly 57.6% in euros while 25% collectively is in Japanese yen and British pounds. All of these currencies nudged up after the U.S. wage growth report. The $37.1 million fund charges 80 bps in fees a year from investors. This ETF was up 0.5% on January 9 but failed to sustain the gains after hours. Tilt to Treasuries Like 2014, the 10-year Treasury note too was off to a great start this year with yield slipping even below 2% since October. Notably, this was the best yearly start treasuries experienced in 17 years thanks to a spike in market volatility. Demand for 30-year treasury bonds was so high that yields plunged to the lowest level since July 2012. Investors seeking to ride this environment might take interest in iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) . This ultra-popular long-term Treasury ETF with an asset base of $6.6 billion – TLT – has added more than 4% so far in the New Year. TLT charges 15 bps in fees. Glitters of Gold After a tumultuous 2014, gold finally heaved a sigh of relief. Soft global growth, persistent plunge in oil and now the prospect of a delayed rate hike in the U.S. returned the shine of the yellow metal. On January 9, the SPDR Gold Trust ETF (NYSEARCA: GLD ) – the product tracking gold bullion -added about 1.14%. In the year-to-date frame, this $27.6 billion fund was up 3.2%. The ETF charges 40 bps in fees. Bottom Line As a caveat, investors should note that the outlook is quite rough for the inverse dollar and gold ETF. This is more the case for UDN, which tracks the greenback against currencies like the presently nine-year low euro. These ETFs will turn out winners as long as volatility and downbeat sentiments over the U.S. market prevail. Thus, investors need to be aware of the market at large before considering these investment options.