what to research on possible "too good to be true" ETF

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wstalcup
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what to research on possible "too good to be true" ETF

Post by wstalcup »

Hi,

I invested a little bit of money (amount I could afford to lose ) on VMIN because it had a very high return history. I've held it only for 1 month and sure enough, so far, the unrealized gain has been amazing! (~30%) BUT it is very un-Boglehead to say the least.
1) Net assets: less than 20 million
2) Expense ratio: 3.13%
3) very small and basically unheard company: VolMAXX
4) very small dollar trading volume ($500,000 a day)
5) only 6 holdings!
7) After some research.. I still can't figure out exactly what it is investing in "SHORT VIX WEEKLY FUTURES STRATEGY" ? :P

by no means, I am recommending this ETF as it sounds "too good to be true"! What red flags or other things should I look into? I'm trying to decide if its worth it to buy a little more or just get out of it while I still can! Thanks! oh, also how can I tell if this is a closed-end fund or not?

https://www.volmaxx.com/rex-volmaxx-sho ... rategy-etf
Last edited by wstalcup on Mon Oct 09, 2017 9:37 am, edited 1 time in total.
Best investment advice: "Invest in your education" -Bill Gates
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oldcomputerguy
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Re: what to research on possible "too good to be true" ETF

Post by oldcomputerguy »

Have you read the Prospectus? Did you understand it? If not, why in the world would you want to invest?

This past weekend DW and I took a day trip to a nearby casino. I walked out with $200 more than I had when I walked in. Doesn't mean that the casino is a winning strategy for me; in fact it typically is a solid loser. I just happened to get lucky this weekend.

You got lucky. Get out while you can.
marklar13
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Re: what to research on possible "too good to be true" ETF

Post by marklar13 »

Whether following a boglehead strategy or not, investing in something that you do not understand is not a good idea. I would get say get out while you are ahead. Do some research on what you want to invest in (whether it be a boglehead recommended 3-fund portfolio, or some other investments), then make a plan, then invest.
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wstalcup
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Re: what to research on possible "too good to be true" ETF

Post by wstalcup »

yep, read the info. I just don't truly understand the mechanics of volatility index and then shorting in the short term. Its only been around for a little over a year and has a total of ~200% return including a 34% dividend payout. It was the top performing ETF at the time (and I believe still is) AND I only put a little money in it that I could afford to lose anyway.

Also, there has been ETFs, stocks, that I've understood and they haven't worked out. I've seen strong solid companies beat there their estimated earnings and still take a nose dive. "Nobody knows Nothing"
Best investment advice: "Invest in your education" -Bill Gates
alex_686
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Re: what to research on possible "too good to be true" ETF

Post by alex_686 »

The ETF is following the VIX index. https://en.wikipedia.org/wiki/VIX

The VIX index - aka the fear index. First, read up on Black-Scholes model. https://en.wikipedia.org/wiki/Black%E2% ... oles_model

How do you price a option - call or put - on the S&P 500? You need a few inputs - price of the underlying asset, time to expiration, the risk free rate, and the volatility of the asset. Or if you know the price of the option, you can work backwards and figure out what the volatility is. Know that we know it we can formalize it and package it. When fear goes up, option prices spike, so the VIX increases.

Consider this. The VIX is a derivative of the S&P's option - which is also a derivative. Derivative squared so to say. My guess is that this ETF should be grouped with the daily (inverses) leveraged funds. Suitable for short term trading on your belief of volatility. This is not for long term passive holding. You picked a period that it did well. Ultimately this is a zero sum game.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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k66
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Re: what to research on possible "too good to be true" ETF

Post by k66 »

A few oddities that I see:

a) as you noted, it has only been operational for a very short period of time (April 2016)
b) it appears to be an "inverse" (leveraged) type of fund which is usually an unproductive investment for the long-run
c) it executed a 2:1 split at the end of last year (why?)
d) it has really only made one distribution/dividend payment ($9.94 on a $34 stock price)--which was very significant, but can it be replicated? (yes, there was an earlier div payment of $0.01, but that almost doesn't count)
e) it has a very high MER (>3%); does it also have other compensation schemes (e.g. 20% over highwater)?

If it were advice that I was trying to give to myself, I would suggest that I liquidate and move on. I would also remind myself to follow my IPS (or write one if I didn't have one already) because it is there for a very good reason!

Also: Given that VMIN is an ETF, I also believe that it cannot be a closed-end fund (someone please correct me if an ETF can also be a CEF).
LOSER of the Boglehead Contest 2015 | lang may yer lum reek
not4me
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Re: what to research on possible "too good to be true" ETF

Post by not4me »

A quick glance only at the etf, but it looks to me that it basically is shorting (betting the opposite direction) of the shortest term "fear index" or Vix. Not exclusively, but mostly larger, professional investors will use options as insurance against possible moves in the index. Those collectively gauge expectations as to whether the market will go up or down. Fewer take out insurance if they expect very stable markets. So, often world events trigger headline risk that cause sharp movements...thus causing a spike in "fear". These types of ETFs often reset daily, so each day you take a new position. Guess one way to view this is that as a holder of this etf you've functioned like a catastrophic insurance company....collecting premiums from customers. If a insurance claim is filed, the company will have to pay (& etf performance will go down)...
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wstalcup
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Re: what to research on possible "too good to be true" ETF

Post by wstalcup »

thanks!, great info! so let's see if I understand this correctly..

So, as long as investors, think more than 50% of the time, that the market will not be too volatile in the short term then this ETF will continue to increase?
Whether or not the market IS actually very volatile or not..as long as most investors think for the short term it will not be..it would still continue to rise?

I
Best investment advice: "Invest in your education" -Bill Gates
technovelist
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Re: what to research on possible "too good to be true" ETF

Post by technovelist »

This is basically a lottery ticket.

Enjoy any gains you get, but don't count on them. They can evaporate as fast as (or faster than) they arrive.
In theory, theory and practice are identical. In practice, they often differ.
not4me
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Re: what to research on possible "too good to be true" ETF

Post by not4me »

wstalcup wrote: Mon Oct 09, 2017 10:43 am thanks!, great info! so let's see if I understand this correctly..

So, as long as investors, think more than 50% of the time, that the market will not be too volatile in the short term then this ETF will continue to increase?
Whether or not the market IS actually very volatile or not..as long as most investors think for the short term it will not be..it would still continue to rise?

I
The easiest part of this would be to find someone who knows much more than me about this! But, I'll weigh in & hope someone else can speak more clearly....

I don't know where the "50%" bogey came from, so I won't comment on that. There are lots of moving parts usually to these types of ETFs which make them really hard to get a feel for. In a way, I think you may be right in that it is more what investors collectively think than whether the market actually is. But, realize that if a headline pops out & the market spikes, that WILL USUALLY change what investors expect & they may take immediate, often dramatic action. With low volume, you may have difficulty exiting your position. If I'm right that they reset every day, they are having high turnover (at least part of reason for high expense). Also means that a loss today takes an even higher gain tomorrow to re-gain ground. A spike up in fear is more common in my experience than a spike down. I think they are usually designed for experienced investors to use for a few days to offset particular risk. I imagine their prospectus will warn that they are NOT investments.

To be clear, I wouldn't want to own it. I'd feel as if I was betting against the collective thought of the big investors who spend much more time than myself on determining risk management.
alex_686
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Re: what to research on possible "too good to be true" ETF

Post by alex_686 »

wstalcup wrote: Mon Oct 09, 2017 10:43 am So, as long as investors, think more than 50% of the time, that the market will not be too volatile in the short term then this ETF will continue to increase?
Whether or not the market IS actually very volatile or not..as long as most investors think for the short term it will not be..it would still continue to rise?
Yes, the VIX is forward looking. What the market is doing now does not matter, it is what people think will be happening in the next 2 weeks is what matters.

You don't make money if forward expected volatility is stable. You make money if it falls. We can debate on how low it will go but volatility can't forward drop towards zero.

Lastly, consider that this funds rebalances often. That means its long term return is path dependent. If the VIX fell over a year returns may actually be negative depending on the path it took. Counter intuitive but true.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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