Page 2 of 3

Re: More Nanny State From Vanguard

Posted: Tue Jan 08, 2019 2:15 pm
by alex_686
nisiprius wrote: Tue Jan 08, 2019 1:28 pmMany brokerages do not offer many specific mutual funds from other companies, even if they are legitimately registered. For example, you cannot buy the world's oldest mutual fund, MFS Massachusetts Investors Trust, retail class A, MITTX, at Vanguard. At one time, yes, you could; not now. Meanwhile, Vanguard mutual funds are "banned" at Morgan Stanley.
This is not the best example. Each mutual fund family needs to be networked in individually. A fair amount of back office work is involved. I understand why the number of fund families would be limited. Real costs here.

However, ETFs trade and operate just like any other stock. So the operational overhead is exactly the same as any other stock.

Re: It's the right thing to do

Posted: Tue Jan 08, 2019 2:26 pm
by ReformedSpender
Taylor Larimore wrote: Tue Jan 08, 2019 2:05 pm
zx14rr:

Thank you for the alert:

I read the Vanguard article and applaud their decision--to no longer sell leveraged and inverse mutual funds which are risky and unsuitable for most investors.

Best wishes
Taylor
Taylor, continuing to play devil's advocate, but international stocks are categorized as a risk factor of "5" and considered unnecessary or inappropriate depending on an individuals personal opinion/preference, similar to this very discussion and view points on leveraged ETF's/ETN's. Should Vanguard then remove international equities if they are looking out for the little guy? What about buying on margin? Heck, even individual stock picking assumes its own risks.

I do side with the motion that this decision has more to do with cost-free ETF's versus potential liability. Still an interesting move nonetheless.

Re: More Nanny State From Vanguard

Posted: Tue Jan 08, 2019 2:34 pm
by Doc
There have been a number of comments about whether a broker can ban some mutual funds. But my question was whether they could ban ETF's listed on an exchange like NASDAQ.

The idea of discriminating by setting a different fee structure is different from a Vanguard actually banning a listed Schwab ETF.
barnaclebob wrote: Tue Jan 08, 2019 1:09 pm Yes, they could.
That's scary.

Re: More Nanny State From Vanguard

Posted: Tue Jan 08, 2019 3:28 pm
by alex_686
HEDGEFUNDIE wrote: Tue Jan 08, 2019 12:39 pm Come on, this statement is simply false. And it's easy to show.

Look at UPRO vs. SPY over this most recent downturn.

Since 9/1/18 SPY is down 12%, UPRO is down 35%.
Ah, anecdotal evidence. I can find fact patters where the S&P is up and the leverage fund is down.

The mathematical relationship between the 2 is straightforward. What primarily matters is volatility, changes in volatility, and if the market is trending or mean reverting. Market direction plays a role, but its power decays fast.

Re: More Nanny State From Vanguard

Posted: Tue Jan 08, 2019 3:43 pm
by jdb
Good for Vanguard. Another reason will keep almost all my investments there. Would not bother me a bit if they also banned option and margin trades if helped reduce their operating costs in platform, which is ideal for us long term buy and hold investors looking for low cost funds. Good luck.

Re: More Nanny State From Vanguard

Posted: Tue Jan 08, 2019 3:47 pm
by barnaclebob
Doc wrote: Tue Jan 08, 2019 2:34 pm There have been a number of comments about whether a broker can ban some mutual funds. But my question was whether they could ban ETF's listed on an exchange like NASDAQ.

The idea of discriminating by setting a different fee structure is different from a Vanguard actually banning a listed Schwab ETF.
barnaclebob wrote: Tue Jan 08, 2019 1:09 pm Yes, they could.
That's scary.
Meh, there is no reason to believe in slippery slope logic at this point.

Re: More Nanny State From Vanguard

Posted: Tue Jan 08, 2019 4:08 pm
by JoMoney
I wonder how many Vanguard customers this would actually impact. My supposition would be not many, and those who do aren't really a good "fit" for Vanguarding.
As a broker, Vanguard does have some responsibility for managing "suitability"

Re: More Nanny State From Vanguard

Posted: Tue Jan 08, 2019 4:24 pm
by zx14rr
JoMoney wrote: Tue Jan 08, 2019 4:08 pm I wonder how many Vanguard customers this would actually impact. My supposition would be not many, and those who do aren't really a good "fit" for Vanguarding.
As a broker, Vanguard does have some responsibility for managing "suitability"
Isn't that why there is the concept of "accredited investor?"

Re: [Vanguard to stop accepting purchases in Leveraged or Inverse mutual funds]

Posted: Tue Jan 08, 2019 4:24 pm
by LadyGeek
I retitled the thread for clarity.

The wiki has some background info: Inverse and leveraged ETFs Note that the FINRA alert at the top of the article (orange box) is the same as the one used by Vanguard.

jaguarpanther, Welcome!

" Vanguard to stop trading of leveraged, inverse investments"

Posted: Tue Jan 08, 2019 4:28 pm
by Paul Romano
[Thread merged into here, see below. --admin LadyGeek]

"Vanguard to stop trading of leveraged, inverse investments"


MARKET NEWSJANUARY 8, 2019 / 4:13 PM /

Jan 8 (Reuters) - Asset manager Vanguard Group said its clients would no longer be able to purchase leveraged or inverse mutual funds, exchange-traded funds and exchange-traded notes.

Leveraged and inverse investments, which are generally incompatible with a buy-and-hold strategy, run counter to Vanguard’s long-term focus, the Pennsylvania-based company said on its website.

The move will take effect from Jan. 22. (Reporting by Mary Ann Alapatt in Bengaluru; Editing by Maju Samuel)

Re: " Vanguard to stop trading of leveraged, inverse investments"

Posted: Tue Jan 08, 2019 4:30 pm
by 123

Re: [Vanguard to stop accepting purchases in Leveraged or Inverse mutual funds]

Posted: Tue Jan 08, 2019 4:34 pm
by LadyGeek
I merged JimmyJammy's into the on-going discussion.

As a reminder, opposing points of view are welcome - which includes disagreeing with Vanguard's decision. Please state your concerns in a civil, respectful manner. General rants are not productive.

Re: [Vanguard to stop accepting purchases in Leveraged or Inverse mutual funds]

Posted: Tue Jan 08, 2019 5:09 pm
by LadyGeek
I merged Paul Romano's thread into the on-going discussion.

Re: [Vanguard to stop accepting purchases in Leveraged or Inverse mutual funds]

Posted: Tue Jan 08, 2019 5:27 pm
by jaguarpanther
Re-Reading Vanguard's email and some of the user comments before they were purged is still pretty jarring. Obviously, many of us that used these instruments have also been lifelong vanguard customers and follow Bogleheads principles. I'm sure some other folks will comment how diametrically opposed that is, and I'll leave it to others to respond better than I can. To be told by your finance company that they are suddenly removing a service out of the blue just made me want to reply, but I don't expect them to care about what I think.

Re: [Vanguard to stop accepting purchases in Leveraged or Inverse mutual funds]

Posted: Tue Jan 08, 2019 5:42 pm
by zx14rr
jaguarpanther wrote: Tue Jan 08, 2019 5:27 pm Re-Reading Vanguard's email and some of the user comments before they were purged is still pretty jarring. Obviously, many of us that used these instruments have also been lifelong vanguard customers and follow Bogleheads principles. I'm sure some other folks will comment how diametrically opposed that is, and I'll leave it to others to respond better than I can. To be told by your finance company that they are suddenly removing a service out of the blue just made me want to reply, but I don't expect them to care about what I think.
Jaguar..., I have been Vanguarding since 1974 and have used the banned products to very successfully supplement my retirement income but you have to do the homework. Any product can be used for day trading but these products can also be buy and hold. I have purchased and continually held these types of products recouping my original investment in less than 5 years with a CAGR greater than 20%. Vanguard's actions are very disappointing after being a Vanguard disciple all of these years, not to mention the administrative burden and potential tax consequences of going somewhere else.

Re: [Vanguard to stop accepting purchases in Leveraged or Inverse mutual funds]

Posted: Tue Jan 08, 2019 5:51 pm
by EfficientInvestor
To add to my earlier post....it is interesting to see what is classified as risky and not risky. For instance, it is widely accepted for a person with a long investing horizon and high risk tolerance to be somewhere between 80-100% equities. While in the accumulation and wealth building phase, it is important to take on more risk in order to open yourself up for greater reward. When drawing closer to retirement and the wealth preservation stage, it is prudent to be more efficient with your reward/risk and get back down to 50% equity or less.

Now, let's take a look at a few examples and see where leveraged ETFs can be beneficial for holding long term. The backtest below uses S&P 500 for stocks and 7-10 year treasuries for bonds. VUSTX is used as a proxy for UST, the 2X ETF for 7-10 year treasuries. The second link shows that they have similar behavior. The backtest begins in 2006, the inception for SSO, the 2X leveraged ETF for the S&P 500.

Portfolio 1 represents a 50/50 portfolio. Portfolio 2 is an 80/20 portfolio. If you were to add 2X leverage (via leveraged ETFs) to the more efficient 50/50 portfolio, you would get Portfolio 3. You would end up with about the same drawdown as the 80/20 portfolio. However, because you are investing at a more efficient point and then adding leverage, you end up with a better return for similar risk. It is true that the return would be even better if it weren't for volatility drag and additional fees, but that is just the nature of taking on more risk and the associated reward/risk inefficiencies. As I said before, just about everyone is ok with the inefficiencies involved with going from a 50/50 portfolio to a 80/20 or 100/0 portfolio. Therefore, what is wrong with taking on some inefficiencies due to volatility drag and some additional fees?

Jul 2006 - Dec 2018
Portfolio 1 - CAGR = 7.0%, Max DD = -20.1%
Portfolio 2 - CAGR = 7.7%, Max DD = -39.3%
Portfolio 3 - CAGR = 10.6%, Max DD = -41.9%
S&P 500 - CAGR = 7.7%, Max DD = -51.0%

https://www.portfoliovisualizer.com/bac ... tion4_3=50

https://www.portfoliovisualizer.com/bac ... ion2_2=100

Now this statement will be a little Devil's advocate....If Vanguard, or any broker, is looking out for their client's best interests, should they also not allow us to invest 80-100% of our money in stock funds? This example shows that it's just as risky, if not more risky, than a diversified use of leveraged ETFs.

Re: More Nanny State From Vanguard

Posted: Tue Jan 08, 2019 6:01 pm
by arcticpineapplecorp.
EfficientInvestor wrote: Tue Jan 08, 2019 12:35 pm I can understand where Vanguard is coming from, but I generally wouldn't expect this king of action from a broker. That being said, I think buying and holding leveraged ETFs long term can be very powerful if used correctly. The way to do it is through a diversified approach. Something along the lines of 30-40% stock, 40-50% bonds (my preference is treasuries), and 10-15% gold. If leveraged ETFs had been around for the last 30 years, you could have constructed a portfolio that would have done very well. If you are skeptical, you can pull daily data from the indexes and calculate how these funds would have performed. I did this and pulled the daily data into Portfolio Visualizer and created my own ticker symbols for these simulated funds. Below are results from a backtest from Jan 1987 - Dec 2018 using data from the S&P 500, Long Term Treasuries, and Gold:

45% UPRO (3X S&P 500)
40% TMF (3X Long Term Treasury)
15% UGLD (3X Gold)

Jan 1987 - Dec 2018
CAGR = 21.3%
Max Drawdown = -49%


Over this same time period, the S&P 500 had a CAGR of 9.9% and a max drawdown of -51%. Despite the volatility drag that may have occurred in certain years, the leveraged ETF portfolio would have greatly outperformed the S&P 500 with a similar amount of drawdown risk. For what it's worth, the CAGR of the portfolio would have been closer to 30% had Nasdaq and Small Cap funds been used and max drawdown would have still been around -50%.
It's easy to write down numbers, but can you show us where you got the bits in red above? I don't see any "source" behind your information. I'm not saying you're wrong or lying. I just like to see where people get the numbers they spout off. I am also curious because when I research these three funds, I can't find data back to Jan 1987. And the third reason I'm curious is because the three you mentioned are etfs and the earliest etf was founded in 1990 (source: https://www.google.com/search?client=fi ... +etf+start). So can you help me out?

Because when I look at morningstar TMF only goes back to 4/16/09, UPRO only goes back to 6/23/09, and UGLD only goes back to 10/14/11. source: https://quotes.morningstar.com/chart/fu ... A%5B%5D%7D

When I use portfoliovisualizer it tells me UPRO data is only available from July 2009, TMF is only available from May 2009 and UGLD data is only available from Nov 2011. (source: https://www.portfoliovisualizer.com/bac ... ion3_3=100). And porfolio visualizer goes back to 1985, but it's funny I can't find the three etfs you mentioned back to 1987. Are you sure your starting point is correct?

While UPRO (in orange below) did better than "the market" (in blue below) the other two (in green and yellow below) underperformed back to 2009. My sources are below. Where are yours?

Image

source: https://quotes.morningstar.com/chart/fu ... A%5B%5D%7D

Re: [Vanguard to stop accepting purchases in Leveraged or Inverse mutual funds]

Posted: Tue Jan 08, 2019 6:09 pm
by columbia
EfficientInvestor wrote: Tue Jan 08, 2019 5:51 pm To add to my earlier post....it is interesting to see what is classified as risky and not risky. For instance, it is widely accepted for a person with a long investing horizon and high risk tolerance to be somewhere between 80-100% equities. While in the accumulation and wealth building phase, it is important to take on more risk in order to open yourself up for greater reward. When drawing closer to retirement and the wealth preservation stage, it is prudent to be more efficient with your reward/risk and get back down to 50% equity or less.

Now, let's take a look at a few examples and see where leveraged ETFs can be beneficial for holding long term. The backtest below uses S&P 500 for stocks and 7-10 year treasuries for bonds. VUSTX is used as a proxy for UST, the 2X ETF for 7-10 year treasuries. The second link shows that they have similar behavior. The backtest begins in 2006, the inception for SSO, the 2X leveraged ETF for the S&P 500.

Portfolio 1 represents a 50/50 portfolio. Portfolio 2 is an 80/20 portfolio. If you were to add 2X leverage (via leveraged ETFs) to the more efficient 50/50 portfolio, you would get Portfolio 3. You would end up with about the same drawdown as the 80/20 portfolio. However, because you are investing at a more efficient point and then adding leverage, you end up with a better return for similar risk. It is true that the return would be even better if it weren't for volatility drag and additional fees, but that is just the nature of taking on more risk and the associated reward/risk inefficiencies. As I said before, just about everyone is ok with the inefficiencies involved with going from a 50/50 portfolio to a 80/20 or 100/0 portfolio. Therefore, what is wrong with taking on some inefficiencies due to volatility drag and some additional fees?

Jul 2006 - Dec 2018
Portfolio 1 - CAGR = 7.0%, Max DD = -20.1%
Portfolio 2 - CAGR = 7.7%, Max DD = -39.3%
Portfolio 3 - CAGR = 10.6%, Max DD = -41.9%
S&P 500 - CAGR = 7.7%, Max DD = -51.0%

https://www.portfoliovisualizer.com/bac ... tion4_3=50

https://www.portfoliovisualizer.com/bac ... ion2_2=100

Now this statement will be a little Devil's advocate....If Vanguard, or any broker, is looking out for their client's best interests, should they also not allow us to invest 80-100% of our money in stock funds? This example shows that it's just as risky, if not more risky, than a diversified use of leveraged ETFs.

I liked at those links and didn’t see the doomsday tracking assertions (by others, including VG).

What am I missing?

Re: More Nanny State From Vanguard

Posted: Tue Jan 08, 2019 7:41 pm
by JonFromDimensionC137
HEDGEFUNDIE wrote: Tue Jan 08, 2019 11:56 am
JonFromDimensionC137 wrote: Tue Jan 08, 2019 10:54 am There is no reason for a retail investor to ever touch these funds. They're absolute money pits. You're free to go open a brokerage account elsewhere and trade them, just like Vanguard is free to help customers avoid destructive decisions.
Lifecycle investing is a legitimate strategy that uses leverage to smooth out risk. Leveraged ETFs are a cheaper and safer way of accessing leverage than margin.
Leveraged funds change their exposure every day. I'd suggest you read the prospectuses if you don't understand how they work, especially before using them in ways other than how they were intended.

Re: More Nanny State From Vanguard

Posted: Tue Jan 08, 2019 7:46 pm
by HEDGEFUNDIE
JonFromDimensionC137 wrote: Tue Jan 08, 2019 7:41 pm
HEDGEFUNDIE wrote: Tue Jan 08, 2019 11:56 am
JonFromDimensionC137 wrote: Tue Jan 08, 2019 10:54 am There is no reason for a retail investor to ever touch these funds. They're absolute money pits. You're free to go open a brokerage account elsewhere and trade them, just like Vanguard is free to help customers avoid destructive decisions.
Lifecycle investing is a legitimate strategy that uses leverage to smooth out risk. Leveraged ETFs are a cheaper and safer way of accessing leverage than margin.
Leveraged funds change their exposure every day. I'd suggest you read the prospectuses if you don't understand how they work, especially before using them in ways other than how they were intended.
I know exactly how they work. They provide 2x or 3x the performance of the underlying index on a daily basis, minus fees. No one has advanced a claim that they do not do this. Over longer periods, sure, the 2x or 3x tracking breaks down, but that's just a function of how math works, not anything nefarious about the funds. And another important point, sometimes the tracking error is in your favor. Over long periods of time, stock indices tend to go up, and so leveraged funds should go up as well, which is what the evidence over the last 10 years shows.

I'd suggest you look at some of the backtests above on how they can be used for constructive purposes in a portfolio.

Re: [Vanguard to stop accepting purchases in Leveraged or Inverse mutual funds]

Posted: Tue Jan 08, 2019 7:48 pm
by OkieIndexer
About 13 years too late. Leveraged ETFs/mutual funds are evil.

Yes, evil.

Re: More Nanny State From Vanguard

Posted: Tue Jan 08, 2019 7:55 pm
by HEDGEFUNDIE
arcticpineapplecorp. wrote: Tue Jan 08, 2019 6:01 pm While UPRO (in orange below) did better than "the market" (in blue below) the other two (in green and yellow below) underperformed back to 2009. My sources are below. Where are yours?

Image

source: https://quotes.morningstar.com/chart/fu ... A%5B%5D%7D
This chart of the individual funds' performance is completely irrelevant to EfficientInvestor's point that a portfolio of uncorrelated assets, leveraged up, can provide higher returns for similar risk as a single unleveraged holding of TSM.

Re: More Nanny State From Vanguard

Posted: Tue Jan 08, 2019 8:10 pm
by arcticpineapplecorp.
HEDGEFUNDIE wrote: Tue Jan 08, 2019 7:55 pm
arcticpineapplecorp. wrote: Tue Jan 08, 2019 6:01 pm While UPRO (in orange below) did better than "the market" (in blue below) the other two (in green and yellow below) underperformed back to 2009. My sources are below. Where are yours?

Image

source: https://quotes.morningstar.com/chart/fu ... A%5B%5D%7D
This chart of the individual funds' performance is completely irrelevant to EfficientInvestor's point that a portfolio of uncorrelated assets, leveraged up, can provide higher returns for similar risk as a single unleveraged holding of TSM.
that's fine. but I'm still asking for proof where he got the data going back to 1987 since I can't find it myself. Still waiting for that.

Re: More Nanny State From Vanguard

Posted: Tue Jan 08, 2019 8:12 pm
by HEDGEFUNDIE
arcticpineapplecorp. wrote: Tue Jan 08, 2019 8:10 pm
HEDGEFUNDIE wrote: Tue Jan 08, 2019 7:55 pm
arcticpineapplecorp. wrote: Tue Jan 08, 2019 6:01 pm While UPRO (in orange below) did better than "the market" (in blue below) the other two (in green and yellow below) underperformed back to 2009. My sources are below. Where are yours?

Image

source: https://quotes.morningstar.com/chart/fu ... A%5B%5D%7D
This chart of the individual funds' performance is completely irrelevant to EfficientInvestor's point that a portfolio of uncorrelated assets, leveraged up, can provide higher returns for similar risk as a single unleveraged holding of TSM.
that's fine. but I'm still asking for proof where he got the data going back to 1987 since I can't find it myself. Still waiting for that.
He said in the post that he simulated the returns of the funds, as if they had existed back to the 80s. Not too hard to do: download the daily returns of the S&P, then double or triple them.

Re: More Nanny State From Vanguard

Posted: Tue Jan 08, 2019 8:23 pm
by nisiprius
Doc wrote: Tue Jan 08, 2019 2:34 pm There have been a number of comments about whether a broker can ban some mutual funds. But my question was whether they could ban ETF's listed on an exchange like NASDAQ...
I asked:
...could someone with a Fidelity account and a little bit of nerve try to buy EQWS, carrying it up to the actual "buy" button and say for sure whether you can buy EQWS at Fidelity?
Whackamole replied:
Gives me an error: "Error:(DB0002) This security is restricted from online opening trades or restricted to closing trades only. For more information please contact a Fidelity representative at 800-544-6666."
So, then, seemingly, Fidelity has "banned" trading in EQWS, and it is not something unique to Vanguard. Thus it seems that no, not all brokers carry all securities that are listed on major exchanges. (EQWS is of interest to me because I like to talk about it when people advocate equal weighting).

Re: [Vanguard to stop accepting purchases in Leveraged or Inverse mutual funds]

Posted: Tue Jan 08, 2019 8:28 pm
by Random Musings
I have never used 2x or higher leveraged products, however, I have used (occasionally) inverse funds and small put positions as hedges. Overall, the usage has improved overall returns.

I guess the reasons that Vanguard is doing this is to mitigate legal risks, have investors that utilize these products move to different platforms and most likely increase average investor returns. Perhaps decrease their costs as well.

Most likely, they have figured out that asset losses will be minimal with this move.

RM

Re: More Nanny State From Vanguard

Posted: Tue Jan 08, 2019 8:29 pm
by aspirit
nisiprius wrote: Tue Jan 08, 2019 8:23 pm
Whakamole wrote: Tue Jan 08, 2019 1:34 pm
...could someone with a Fidelity account and a little bit of nerve try to buy EQWS, carrying it up to the actual "buy" button and say for sure whether you can buy EQWS at Fidelity?
Gives me an error: "Error:(DB0002) This security is restricted from online opening trades or restricted to closing trades only. For more information please contact a Fidelity representative at 800-544-6666."
So, then, seemingly, Fidelity has "banned" trading in EQWS, and it is not something unique to Vanguard. Not all brokers carry all securities that are listed on major exchanges. (EQWS is of interest to me because I like to talk about it when people advocate equal weighting).
EQWS - Invesco Russell 2000 Equal Weight ETF

The Invesco Russell 2000 Equal Weight ETF is based on the Russell 2000® Equal Weight Index. The Fund will invest at least 90% of its total assets in the component securities that comprise the Index. The Index is designed to provide equal-weighted exposure to approximately 2,000 mid- and small-cap US companies in the larger US equity market. The Fund and the Index are rebalanced quarterly and reconstituted annually.

Effective on Wednesday, February 20, 2019, the Fund will be liquidated and it will be its final day of trading. Please see the Fund’s prospectus for further information.

fwiw.... :happy

Re: [Vanguard to stop accepting purchases in Leveraged or Inverse mutual funds]

Posted: Tue Jan 08, 2019 9:44 pm
by EfficientInvestor
columbia wrote: Tue Jan 08, 2019 6:09 pm I liked at those links and didn’t see the doomsday tracking assertions (by others, including VG).

What am I missing?
For me, the doomsday to be aware of is more due to the potential downside of buying and holding a leveraged ETF by itself. The backtest at the link below shows that the 2X S&P 500 ETF had a drawdown over 80% and took over 6 years to come back. The volatility decay is something to be aware of and accounted for, but the potential drawdown is the major concern to me. That is why diversification is important.

https://www.portfoliovisualizer.com/bac ... ion1_1=100

Re: More Nanny State From Vanguard

Posted: Tue Jan 08, 2019 9:51 pm
by Whakamole
nisiprius wrote: Tue Jan 08, 2019 8:23 pm
Doc wrote: Tue Jan 08, 2019 2:34 pm There have been a number of comments about whether a broker can ban some mutual funds. But my question was whether they could ban ETF's listed on an exchange like NASDAQ...
I asked:
...could someone with a Fidelity account and a little bit of nerve try to buy EQWS, carrying it up to the actual "buy" button and say for sure whether you can buy EQWS at Fidelity?
Whackamole replied:
Gives me an error: "Error:(DB0002) This security is restricted from online opening trades or restricted to closing trades only. For more information please contact a Fidelity representative at 800-544-6666."
So, then, seemingly, Fidelity has "banned" trading in EQWS, and it is not something unique to Vanguard. Thus it seems that no, not all brokers carry all securities that are listed on major exchanges. (EQWS is of interest to me because I like to talk about it when people advocate equal weighting).
I don't think Fidelity has banned it, actually, per further research. The ETF is being liquidated next month; this was announced last month. Fidelity is letting me place an order for RSP, which is the S&P 500 equal weight fund also by Invesco that is not being liquidated.

Re: [Vanguard to stop accepting purchases in Leveraged or Inverse mutual funds]

Posted: Tue Jan 08, 2019 9:57 pm
by Whakamole
EfficientInvestor wrote: Tue Jan 08, 2019 9:44 pm
columbia wrote: Tue Jan 08, 2019 6:09 pm I liked at those links and didn’t see the doomsday tracking assertions (by others, including VG).

What am I missing?
For me, the doomsday to be aware of is more due to the potential downside of buying and holding a leveraged ETF by itself. The backtest at the link below shows that the 2X S&P 500 ETF had a drawdown over 80% and took over 6 years to come back. The volatility decay is something to be aware of and accounted for, but the potential drawdown is the major concern to me. That is why diversification is important.

https://www.portfoliovisualizer.com/bac ... ion1_1=100
An even riskier thing is shorting a stock, yet you can do that with a margin account: https://investor.vanguard.com/investing ... -on-margin

Re: [Vanguard to stop accepting purchases in Leveraged or Inverse mutual funds]

Posted: Tue Jan 08, 2019 10:12 pm
by wootwoot
Leveraged and inverse ETFs always cost money to trade at Vanguard. It's interesting to see them cut off a source of revenue like this. Inverse ETFs also provided retirement account holders a way to short the market, removing these gets rid of this option.

Re: More Nanny State From Vanguard

Posted: Tue Jan 08, 2019 10:18 pm
by triceratop
alex_686 wrote: Tue Jan 08, 2019 2:15 pm
nisiprius wrote: Tue Jan 08, 2019 1:28 pmMany brokerages do not offer many specific mutual funds from other companies, even if they are legitimately registered. For example, you cannot buy the world's oldest mutual fund, MFS Massachusetts Investors Trust, retail class A, MITTX, at Vanguard. At one time, yes, you could; not now. Meanwhile, Vanguard mutual funds are "banned" at Morgan Stanley.
This is not the best example. Each mutual fund family needs to be networked in individually. A fair amount of back office work is involved. I understand why the number of fund families would be limited. Real costs here.

However, ETFs trade and operate just like any other stock. So the operational overhead is exactly the same as any other stock.
This is true, and I want to add to it, and address nisiprius' other point:
And most if not all brokerages exercise discrimination by making selected funds and selected ETFs available without fees, but not the rest. If it's OK for TD Ameritrade to drop all Vanguard ETFs from its "no-fee" list, which they did in 2017, why wouldn't it be OK for a broker to drop an ETF completely?
Brokers also already exercise discrimination in not making selected ETFs available at all. A quick search will confirm that various fairly-innocuous ETF products cannot be traded on Merrill Edge at all, let alone without fees.

Re: More Nanny State From Vanguard

Posted: Tue Jan 08, 2019 10:47 pm
by EfficientInvestor
arcticpineapplecorp. wrote: Tue Jan 08, 2019 6:01 pm
EfficientInvestor wrote: Tue Jan 08, 2019 12:35 pm I can understand where Vanguard is coming from, but I generally wouldn't expect this king of action from a broker. That being said, I think buying and holding leveraged ETFs long term can be very powerful if used correctly. The way to do it is through a diversified approach. Something along the lines of 30-40% stock, 40-50% bonds (my preference is treasuries), and 10-15% gold. If leveraged ETFs had been around for the last 30 years, you could have constructed a portfolio that would have done very well. If you are skeptical, you can pull daily data from the indexes and calculate how these funds would have performed. I did this and pulled the daily data into Portfolio Visualizer and created my own ticker symbols for these simulated funds. Below are results from a backtest from Jan 1987 - Dec 2018 using data from the S&P 500, Long Term Treasuries, and Gold:

45% UPRO (3X S&P 500)
40% TMF (3X Long Term Treasury)
15% UGLD (3X Gold)

Jan 1987 - Dec 2018
CAGR = 21.3%
Max Drawdown = -49%


Over this same time period, the S&P 500 had a CAGR of 9.9% and a max drawdown of -51%. Despite the volatility drag that may have occurred in certain years, the leveraged ETF portfolio would have greatly outperformed the S&P 500 with a similar amount of drawdown risk. For what it's worth, the CAGR of the portfolio would have been closer to 30% had Nasdaq and Small Cap funds been used and max drawdown would have still been around -50%.
It's easy to write down numbers, but can you show us where you got the bits in red above? I don't see any "source" behind your information. I'm not saying you're wrong or lying. I just like to see where people get the numbers they spout off. I am also curious because when I research these three funds, I can't find data back to Jan 1987. And the third reason I'm curious is because the three you mentioned are etfs and the earliest etf was founded in 1990 (source: https://www.google.com/search?client=fi ... +etf+start). So can you help me out?
You can't find it on PortfolioVisualizer because you have to generate your own proxy funds that go back further in time than the actual funds. For UPRO, I pulled daily data for ^GSPC from Yahoo Finance. For TMF, I pulled daily data for VUSTX from Yahoo Finance. For UGLD, I pulled daily data from Gold.org. For each fund, I created a spreadsheet that multiplied each daily performance by 3 and subtracted 1%/250 to account for expense ratio. I then uploaded the daily data to PortfolioVisualizer via "Import Benchmark" and created my own ticker symbols for the proxy funds. You can then backtest those ticker symbols like you would with any other ticker symbol. I created proxies for UPRO, TMF, and UGLD and then performed the backtest that resulted in the CAGR and drawdown presented in my original post.

TMF was tricky because you have to take into account the dividend (daily close vs adjusted daily close). For this, I did a weighted average of each value and iterated until I found a blend of the two that matched the performance of TMF. For each proxy fund, I compared the proxy to the actual 3x ETF to confirm that the proxy matches actual performance of the fund since inception. Once this was confirmed, I was confident that the proxy could be applied prior to inception of the actual fund. The image below is the comparison of the proxy TMF fund (red line) to the actual TMF fund (blue line). It's not perfect, but it was close enough to give me confidence for the purpose of a backtest. In this case, TLT would have been a better data source than VUSTX, but VUSTX provided data back to 1987.

Image

Re: More Nanny State From Vanguard

Posted: Wed Jan 09, 2019 11:11 am
by JonFromDimensionC137
HEDGEFUNDIE wrote: Tue Jan 08, 2019 7:46 pm
JonFromDimensionC137 wrote: Tue Jan 08, 2019 7:41 pm
HEDGEFUNDIE wrote: Tue Jan 08, 2019 11:56 am
JonFromDimensionC137 wrote: Tue Jan 08, 2019 10:54 am There is no reason for a retail investor to ever touch these funds. They're absolute money pits. You're free to go open a brokerage account elsewhere and trade them, just like Vanguard is free to help customers avoid destructive decisions.
Lifecycle investing is a legitimate strategy that uses leverage to smooth out risk. Leveraged ETFs are a cheaper and safer way of accessing leverage than margin.
Leveraged funds change their exposure every day. I'd suggest you read the prospectuses if you don't understand how they work, especially before using them in ways other than how they were intended.
I know exactly how they work. They provide 2x or 3x the performance of the underlying index on a daily basis, minus fees. No one has advanced a claim that they do not do this. Over longer periods, sure, the 2x or 3x tracking breaks down, but that's just a function of how math works, not anything nefarious about the funds. And another important point, sometimes the tracking error is in your favor. Over long periods of time, stock indices tend to go up, and so leveraged funds should go up as well, which is what the evidence over the last 10 years shows.

I'd suggest you look at some of the backtests above on how they can be used for constructive purposes in a portfolio.
The italicized sentence is simply mathematically not true. Though it is true in many cases, it is completely possible to lose money over a long period in a leveraged fund even when the index makes money. Using the last 10 years as evidence is laughable as there has never been another 10-year period of such low volatility in the past.

This table from the SPXL (3x long S&P) prospectus shows how much worse these funds do under higher volatility conditions:
Image
It is worth noting that the table doesn't include any fund costs for implementing their strategy or any management fee.

I'm not arguing about lifecycle investing, just saying that leverage ETFs are an imprecise and poor way to do so. Vanguard not offering leveraged ETFs to customers is completely reasonable, as these funds are never appropriate for retail investors.

Re: More Nanny State From Vanguard

Posted: Wed Jan 09, 2019 12:17 pm
by HEDGEFUNDIE
JonFromDimensionC137 wrote: Wed Jan 09, 2019 11:11 am It is completely possible to lose money over a long period in a leveraged fund even when the index makes money. Using the last 10 years as evidence is laughable as there has never been another 10-year period of such low volatility in the past.

This table from the SPXL (3x long S&P) prospectus shows how much worse these funds do under higher volatility conditions:
Image
Over the past 40 years the S&P 500 has had average annual volatility of just under 15%.

Re: More Nanny State From Vanguard

Posted: Wed Jan 09, 2019 12:28 pm
by EfficientInvestor
EfficientInvestor wrote: Tue Jan 08, 2019 10:47 pm You can't find it on PortfolioVisualizer because you have to generate your own proxy funds that go back further in time than the actual funds. For UPRO, I pulled daily data for ^GSPC from Yahoo Finance. For TMF, I pulled daily data for VUSTX from Yahoo Finance. For UGLD, I pulled daily data from Gold.org. For each fund, I created a spreadsheet that multiplied each daily performance by 3 and subtracted 1%/250 to account for expense ratio. I then uploaded the daily data to PortfolioVisualizer via "Import Benchmark" and created my own ticker symbols for the proxy funds. You can then backtest those ticker symbols like you would with any other ticker symbol. I created proxies for UPRO, TMF, and UGLD and then performed the backtest that resulted in the CAGR and drawdown presented in my original post.

TMF was tricky because you have to take into account the dividend (daily close vs adjusted daily close). For this, I did a weighted average of each value and iterated until I found a blend of the two that matched the performance of TMF. For each proxy fund, I compared the proxy to the actual 3x ETF to confirm that the proxy matches actual performance of the fund since inception. Once this was confirmed, I was confident that the proxy could be applied prior to inception of the actual fund.
I misspoke in my last post. For UPRO, I used daily data from VFINX, not ^GSPC. The daily data from ^GSPC underestimates the performance of UPRO because it does not include the dividend. Therefore, I used daily data from VFINX and followed the same process described above for TMF to generate the daily performance of my UPRO proxy. The image below is the comparison of the proxy UPRO (red line) to the actual UPRO fund (blue line).

Image

Re: [Vanguard to stop accepting purchases in Leveraged or Inverse mutual funds]

Posted: Wed Jan 09, 2019 1:04 pm
by garlandwhizzer
Taylor wrote:

I read the Vanguard article and applaud their decision--to no longer sell leveraged and inverse mutual funds which are risky and unsuitable for most investors.
1+

I totally agree. Vanguard is owned by its shareholders and therefore has its shareholders best interests in mind. Most Vanguard shareholders would not touch these products with a ten foot pole. Some that are interested in them do not fully understand the risk/reward tradeoff they offer. I see this as a sign that unlike most financial companies, Vanguard favors the long term success of its customers over increasing its profits much to their credit. Leveraged and inverse mutual funds are primarily short term trading vehicles with in my opinion a poor risk/return profile. They are designed primarily to generate profits for those who create and market them, not because they embody some investing magic. In order to be successful using them the buyer has to accurately foresee the near term future of the market and no one, without exception, knows that with consistent reliability. Like many other products of the financial industry, they are unnecessary frill and likely to detract from rather than improve the average investors long term results. The secret to investing success is to design a good long term portfolio and gradually add to it for decades, not to make repeated bets on whether the market is going up or down short term based on the latest news. If you prefer betting to long term investing they may work for you assuming you know what the future holds for the market over a given time frame better than the market that sets the prices for these approaches does.

Garland Whizzer

Re: [Vanguard to stop accepting purchases in Leveraged or Inverse mutual funds]

Posted: Wed Jan 09, 2019 1:15 pm
by ftobin
One reason why a low-cost platform like Vanguard might want to ban trading in certain products is because they need to send the orders to a market maker for handling. That market maker doesn't want to handle toxic flow because it costs them money, and part of their agreement with Vanguard is likely that in order to provide good price improvement, the flow coming in needs to be retail-ish. The inverse/leveraged products are the opposite of being retail.

Re: [Vanguard to stop accepting purchases in Leveraged or Inverse mutual funds]

Posted: Wed Jan 09, 2019 1:19 pm
by HEDGEFUNDIE
Here is an actionable question, for those of us who would like to implement a long term strategy using these leveraged ETFs, which brokerage is the best place to move to?

Ideally one that would meet the following characteristics:

1. ~6 free trades per quarter (for rebalancing)
2. Allows IRAs (to eliminate tax cost, Robinhood is out)

[Deleted]

Posted: Wed Jan 09, 2019 1:24 pm
by hdas
[Deleted]

Re: [Vanguard to stop accepting purchases in Leveraged or Inverse mutual funds]

Posted: Wed Jan 09, 2019 1:27 pm
by alex_686
ftobin wrote: Wed Jan 09, 2019 1:15 pm One reason why a low-cost platform like Vanguard might want to ban trading in certain products is because they need to send the orders to a market maker for handling. That market maker doesn't want to handle toxic flow because it costs them money, and part of their agreement with Vanguard is likely that in order to provide good price improvement, the flow coming in needs to be retail-ish. The inverse/leveraged products are the opposite of being retail.
This is not the answers, for a couple of reasons. First, all trades flow through market makers. For illiquid things this mean a large bid/ask spread. This is born by the investor, not the broker. Next, the broker must make reasonable efforts for best execution. If the spread is large, it is not their issue. this is no need to provide "provide good price improvement". Lastly, the leveraged ETFs do a brisk business on the the major exchanges, with good bid/ask spreads.

I have said it before and I suspect I will say it again. Leverage and inverse ETFs trade just like other stocks and ETFs, and have the same operational overhead as other stocks and ETFs. Whatever reason Vanguard is using to ban these products, it is not because how they are traded or held.

Re: More Nanny State From Vanguard

Posted: Wed Jan 09, 2019 1:56 pm
by JonFromDimensionC137
HEDGEFUNDIE wrote: Wed Jan 09, 2019 12:17 pm
JonFromDimensionC137 wrote: Wed Jan 09, 2019 11:11 am It is completely possible to lose money over a long period in a leveraged fund even when the index makes money. Using the last 10 years as evidence is laughable as there has never been another 10-year period of such low volatility in the past.

This table from the SPXL (3x long S&P) prospectus shows how much worse these funds do under higher volatility conditions:
Image
Over the past 40 years the S&P 500 has had average annual volatility of just under 15%.
Exactly. Table shows you can expect material long term underperformance at that level.

Re: More Nanny State From Vanguard

Posted: Wed Jan 09, 2019 3:09 pm
by HEDGEFUNDIE
JonFromDimensionC137 wrote: Wed Jan 09, 2019 1:56 pm
HEDGEFUNDIE wrote: Wed Jan 09, 2019 12:17 pm
JonFromDimensionC137 wrote: Wed Jan 09, 2019 11:11 am It is completely possible to lose money over a long period in a leveraged fund even when the index makes money. Using the last 10 years as evidence is laughable as there has never been another 10-year period of such low volatility in the past.

This table from the SPXL (3x long S&P) prospectus shows how much worse these funds do under higher volatility conditions:
Image
Over the past 40 years the S&P 500 has had average annual volatility of just under 15%.
Exactly. Table shows you can expect material long term underperformance at that level.
Are we looking at the same chart?

What I see at the 10% volatility level is outperformance on both the upside (i.e. better than 3x return) and the downside (i.e. better than -3x return), with the exception of years that have 0% return. Yes, there will be years where the volatility spikes to 50% and the underperformance shows up, but those years are few and far between, and are more than made up for by the outperformance during the more typical low volatility years.

Not to mention what happens when you pair this with a negatively correlated asset leveraged at the same ratio.

Re: More Nanny State From Vanguard

Posted: Wed Jan 09, 2019 9:50 pm
by wootwoot
JonFromDimensionC137 wrote: Wed Jan 09, 2019 1:56 pm
HEDGEFUNDIE wrote: Wed Jan 09, 2019 12:17 pm
JonFromDimensionC137 wrote: Wed Jan 09, 2019 11:11 am It is completely possible to lose money over a long period in a leveraged fund even when the index makes money. Using the last 10 years as evidence is laughable as there has never been another 10-year period of such low volatility in the past.

This table from the SPXL (3x long S&P) prospectus shows how much worse these funds do under higher volatility conditions:
Image
Over the past 40 years the S&P 500 has had average annual volatility of just under 15%.
Exactly. Table shows you can expect material long term underperformance at that level.
Nobody trading leveraged ETFs is holding them long term. These are vehicles that are designed to be traded.

Re: Vanguard to stop accepting leveraged and inverse investments??

Posted: Wed Jan 09, 2019 11:43 pm
by phantom0308
zx14rr wrote: Tue Jan 08, 2019 12:32 pm
JoMoney wrote: Tue Jan 08, 2019 12:28 pm I doubt that it relates to individual stocks, only to "funds" and ETNs.
Not surprising, as those funds are explicitly designed for day-trading, not long-term investment.
A frequent disclaimer in Vanguard's products:
"Do not invest with Vanguard if you are a market-timer."
Market timing has nothing to do with it. I have purchased but never sold an exchange traded note. Leveraged ETNs are a way to achieve significant income and still maintain a balanced portfolio.
Does this actually work? I thought volatility drag would kill any returns you’d expect.

Re: [Vanguard to stop accepting purchases in Leveraged or Inverse mutual funds]

Posted: Thu Jan 10, 2019 1:40 am
by ftobin
alex_686 wrote: Wed Jan 09, 2019 1:27 pm
ftobin wrote: Wed Jan 09, 2019 1:15 pm One reason why a low-cost platform like Vanguard might want to ban trading in certain products is because they need to send the orders to a market maker for handling. That market maker doesn't want to handle toxic flow because it costs them money, and part of their agreement with Vanguard is likely that in order to provide good price improvement, the flow coming in needs to be retail-ish. The inverse/leveraged products are the opposite of being retail.
This is not the answers, for a couple of reasons. First, all trades flow through market makers. For illiquid things this mean a large bid/ask spread. This is born by the investor, not the broker. Next, the broker must make reasonable efforts for best execution. If the spread is large, it is not their issue. this is no need to provide "provide good price improvement". Lastly, the leveraged ETFs do a brisk business on the the major exchanges, with good bid/ask spreads.
The market maker is taking on risk because it needs to internalize flow to provide price improvement. Inverse/leveraged securities can be more costly to hedge than vanilla securites. Additionally, the inverse/leveraged instruments are usually used by more informed traders, who are more costly to handle.

Market makers often say to the sending firm "we can provide excellent price improvement if you keep this X flow away from us. If you send this X flow, we're going to need to reduce the price improvement we can provide overall."

Re: More Nanny State From Vanguard

Posted: Thu Jan 10, 2019 3:08 am
by JonFromDimensionC137
HEDGEFUNDIE wrote: Wed Jan 09, 2019 3:09 pm
JonFromDimensionC137 wrote: Wed Jan 09, 2019 1:56 pm
HEDGEFUNDIE wrote: Wed Jan 09, 2019 12:17 pm
JonFromDimensionC137 wrote: Wed Jan 09, 2019 11:11 am It is completely possible to lose money over a long period in a leveraged fund even when the index makes money. Using the last 10 years as evidence is laughable as there has never been another 10-year period of such low volatility in the past.

This table from the SPXL (3x long S&P) prospectus shows how much worse these funds do under higher volatility conditions:
Image
Over the past 40 years the S&P 500 has had average annual volatility of just under 15%.
Exactly. Table shows you can expect material long term underperformance at that level.
Are we looking at the same chart?

What I see at the 10% volatility level is outperformance on both the upside (i.e. better than 3x return) and the downside (i.e. better than -3x return), with the exception of years that have 0% return. Yes, there will be years where the volatility spikes to 50% and the underperformance shows up, but those years are few and far between, and are more than made up for by the outperformance during the more typical low volatility years.

Not to mention what happens when you pair this with a negatively correlated asset leveraged at the same ratio.
There has never been a year with 10% volatility. Average VIX since 1996 is like 19.25. https://www.macrotrends.net/2603/vix-vo ... ical-chart. Post-financial crisis has been historically low levels of volatility, so it's tough to imagine that what we can expect in the future is much lower than that. At 19 years with returns with returns between -10% and +20% S&P (a solid majority of outcomes) result in underperformance. That is even before the >1% management fee and costs incurred by the fund to maintain the leverage and rebalance daily.

Re: More Nanny State From Vanguard

Posted: Thu Jan 10, 2019 3:09 am
by JonFromDimensionC137
wootwoot wrote: Wed Jan 09, 2019 9:50 pm
JonFromDimensionC137 wrote: Wed Jan 09, 2019 1:56 pm
HEDGEFUNDIE wrote: Wed Jan 09, 2019 12:17 pm
JonFromDimensionC137 wrote: Wed Jan 09, 2019 11:11 am It is completely possible to lose money over a long period in a leveraged fund even when the index makes money. Using the last 10 years as evidence is laughable as there has never been another 10-year period of such low volatility in the past.

This table from the SPXL (3x long S&P) prospectus shows how much worse these funds do under higher volatility conditions:
Image
Over the past 40 years the S&P 500 has had average annual volatility of just under 15%.
Exactly. Table shows you can expect material long term underperformance at that level.
Nobody trading leveraged ETFs is holding them long term. These are vehicles that are designed to be traded.
Agreed. There are people in this thread advocating for holding them long term.

Re: [Vanguard to stop accepting purchases in Leveraged or Inverse mutual funds]

Posted: Thu Jan 10, 2019 6:39 am
by Derpalator
Congratulations Vanguard! Nice to see what they sell is consistent with doing what is best for the average investor. Now if they could just improve their service... :D

Re: [Vanguard to stop accepting purchases in Leveraged or Inverse mutual funds]

Posted: Thu Jan 10, 2019 8:13 am
by wootwoot
Is Vanguard going to stop options trading and margin next? It's hard to keep a consistent message when you ban inverse and leveraged ETFs but allow options and margin.