Newsletter recommending inverse ETF for 2019

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aednichols
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Newsletter recommending inverse ETF for 2019

Post by aednichols » Wed Nov 28, 2018 8:16 pm

Bogleheads:

My Dad subscribes to an investment newsletter that typically has its subscribers invested in a very reasonable lineup of ETFs, with a varying amount of cash set aside based on their perception of market conditions. A degree of market timing, but nothing wildly offensive so far... until....

While I was home for Thanksgiving, he told me they're forecasting a bear market next year and are so confident in this that they have specified adding an inverse equity ETF to the portfolio.

My understanding is that inverse ETFs are totally unsuitable for retail investors because they decay when held for more than a single day. My Dad (age 68) is a knowledgeable buy-and-hold investor but I just cannot see him trading securities like these.

My gut feeling is that the inverse ETF recommendation destroys the credibility of the newsletter and could cause serious harm to one's portfolio. Your thoughts please, and thank you in advance!

Adam

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Re: Newsletter recommending inverse ETF for 2019

Post by HEDGEFUNDIE » Wed Nov 28, 2018 8:35 pm

What was the recommendation?

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aednichols
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Re: Newsletter recommending inverse ETF for 2019

Post by aednichols » Wed Nov 28, 2018 8:37 pm

I don't recall hearing of a specific symbol recommended, more of a "pick one from this class of funds".

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Re: Newsletter recommending inverse ETF for 2019

Post by HEDGEFUNDIE » Wed Nov 28, 2018 8:42 pm

Well it’s obviously market timing.

But if you were convinced the markets would go down next year buying a small position of an inverse S&P 500 ETF is not the worst way to hedge. It would be more negatively correlated to TSM than a cash or bond position, even with the volatility decay.

Here is a backtest of this strategy during the financial crisis, if you had perfect timing:

https://www.portfoliovisualizer.com/bac ... tion3_3=10
Last edited by HEDGEFUNDIE on Wed Nov 28, 2018 8:56 pm, edited 2 times in total.

averagedude
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Re: Newsletter recommending inverse ETF for 2019

Post by averagedude » Wed Nov 28, 2018 8:48 pm

Look up Mark Hulbert. He has researched and tracked the performance of newsletters for years. You could probably do a better job of recommending stocks or asset classes than these people.

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aednichols
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Re: Newsletter recommending inverse ETF for 2019

Post by aednichols » Wed Nov 28, 2018 8:57 pm

Great suggestion. Perusing Hulbert reports, I found that recently the newsletter (Investech) has been ranked at or near the top (perhaps that's how people find out about it). In 1999, it was in the bottom quartile for risk-adjusted return.

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aednichols
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Re: Newsletter recommending inverse ETF for 2019

Post by aednichols » Wed Nov 28, 2018 9:55 pm

One of the funds recommended is SH, http://www.proshares.com/funds/sh.html

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Re: Newsletter recommending inverse ETF for 2019

Post by justsomeguy2018 » Wed Nov 28, 2018 10:08 pm

aednichols wrote:
Wed Nov 28, 2018 9:55 pm
One of the funds recommended is SH, http://www.proshares.com/funds/sh.html
If you're feeling bold, buy a Put Option on VOO!

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Re: Newsletter recommending inverse ETF for 2019

Post by aednichols » Wed Nov 28, 2018 10:23 pm

Both the put and the inverse ETF seem pointless when the portfolio has long positions in broad-market equity ETFs - I think they would have the same mathematical effect as simply increasing the cash allocation, but with the added "bonus" of inter-day decay.

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Re: Newsletter recommending inverse ETF for 2019

Post by justsomeguy2018 » Wed Nov 28, 2018 10:34 pm

aednichols wrote:
Wed Nov 28, 2018 10:23 pm
Both the put and the inverse ETF seem pointless when the portfolio has long positions in broad-market equity ETFs - I think they would have the same mathematical effect as simply increasing the cash allocation, but with the added "bonus" of inter-day decay.
Maybe - I will say this - a long time ago, I once bought 2 opposite ETFs (2/3 bear, 1/3 bull), as an experiment to see what would happen. The bear eventually lost everything, but after 10 years the bull returned 900%!

Anecdotal and pure luck, but point is sometimes competing investments can still pan out.

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Re: Newsletter recommending inverse ETF for 2019

Post by LadyGeek » Wed Nov 28, 2018 10:48 pm

The wiki has some background info: Inverse and leveraged ETFs
wiki wrote:Inverse and leveraged ETFs are not suitable for Boglehead-style (buy and hold) investing. In fact, they are not suitable for investing at all - only for short-term "trading" (speculation) which is clearly stated by the fund provider. Please read the FINRA alert, Leveraged and Inverse ETFs: Specialized Products with Extra Risks for Buy-and-Hold Investors.
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Re: Newsletter recommending inverse ETF for 2019

Post by aednichols » Wed Nov 28, 2018 11:03 pm

Nice walkthrough, thank you.

I graphed SH vs. VTI for the same time period as the wiki, 12/31/2007 to 12/31/2010.

VTI dramatically outperformed SH, -6% to -30%.

Image

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Re: Newsletter recommending inverse ETF for 2019

Post by unclescrooge » Thu Nov 29, 2018 1:32 am

aednichols wrote:
Wed Nov 28, 2018 8:16 pm
Bogleheads:

My Dad subscribes to an investment newsletter that typically has its subscribers invested in a very reasonable lineup of ETFs, with a varying amount of cash set aside based on their perception of market conditions. A degree of market timing, but nothing wildly offensive so far... until....

While I was home for Thanksgiving, he told me they're forecasting a bear market next year and are so confident in this that they have specified adding an inverse equity ETF to the portfolio.

My understanding is that inverse ETFs are totally unsuitable for retail investors because they decay when held for more than a single day. My Dad (age 68) is a knowledgeable buy-and-hold investor but I just cannot see him trading securities like these.

My gut feeling is that the inverse ETF recommendation destroys the credibility of the newsletter and could cause serious harm to one's portfolio. Your thoughts please, and thank you in advance!

Adam
Sounds like they were late to the party. They should've made this recommendation in January.

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Re: Newsletter recommending inverse ETF for 2019

Post by mrspock » Thu Nov 29, 2018 2:48 am

aednichols wrote:
Wed Nov 28, 2018 8:16 pm
Bogleheads:

My Dad subscribes to an investment newsletter that typically has its subscribers invested in a very reasonable lineup of ETFs, with a varying amount of cash set aside based on their perception of market conditions. A degree of market timing, but nothing wildly offensive so far... until....

While I was home for Thanksgiving, he told me they're forecasting a bear market next year and are so confident in this that they have specified adding an inverse equity ETF to the portfolio.

My understanding is that inverse ETFs are totally unsuitable for retail investors because they decay when held for more than a single day. My Dad (age 68) is a knowledgeable buy-and-hold investor but I just cannot see him trading securities like these.

My gut feeling is that the inverse ETF recommendation destroys the credibility of the newsletter and could cause serious harm to one's portfolio. Your thoughts please, and thank you in advance!

Adam
What were the recommendations for the last 3 years? How did they pan out?

Inverse ETFs IIRC are only intended for intraday use (their prospectuses usually spell this out very clearly) due to the use of derivatives. It does not seem wise to hold one for a year, there’s lots of threads on this topic if you want to search.

If you want to short the market, why not just buy more bonds and wait? It will be MUCH cheaper if you end up being wrong.

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aednichols
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Re: Newsletter recommending inverse ETF for 2019

Post by aednichols » Thu Nov 29, 2018 9:57 am

If you want to short the market, why not just buy more bonds and wait? It will be MUCH cheaper if you end up being wrong.
I think there may be a component of salesmanship in the investment choices. To some people, recommending exotic investments will make your newsletter seem like it's adding more value than a boring three-fund portfolio you could find anywhere on the Internet.

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Re: Newsletter recommending inverse ETF for 2019

Post by Random Musings » Thu Nov 29, 2018 11:10 am

aednichols wrote:
Wed Nov 28, 2018 8:16 pm
Bogleheads:

My Dad subscribes to an investment newsletter that typically has its subscribers invested in a very reasonable lineup of ETFs, with a varying amount of cash set aside based on their perception of market conditions. A degree of market timing, but nothing wildly offensive so far... until....

While I was home for Thanksgiving, he told me they're forecasting a bear market next year and are so confident in this that they have specified adding an inverse equity ETF to the portfolio.

My understanding is that inverse ETFs are totally unsuitable for retail investors because they decay when held for more than a single day. My Dad (age 68) is a knowledgeable buy-and-hold investor but I just cannot see him trading securities like these.

My gut feeling is that the inverse ETF recommendation destroys the credibility of the newsletter and could cause serious harm to one's portfolio. Your thoughts please, and thank you in advance!

Adam
Holding cash seems odd. At the least I would hold ST Treasuries when looking at the long-run.

With respect to forecasting a bear market, there are always a lot of wrong calls in the investment letter business. Is this guy/gal 100% confident of a bear market, and if they are, are they extremely low in equity exposure or even net negative with this inverse ETF?

RM
I figure the odds be fifty-fifty I just might have something to say. FZ

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aednichols
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Re: Newsletter recommending inverse ETF for 2019

Post by aednichols » Thu Nov 29, 2018 1:18 pm

With respect to forecasting a bear market, there are always a lot of wrong calls in the investment letter business. Is this guy/gal 100% confident of a bear market, and if they are, are they extremely low in equity exposure or even net negative with this inverse ETF?
The same newsletter predicted a bear market in 2016. The authors don't put a number on the probability; they present pages and pages of technical analysis and "proprietary indicators", which I find incomprehensible and do not trust - however, Dad does and has followed the advice for years.

It is actually quite hard to evaluate the performance of the portfolio, they do not publish numbers anywhere I could find; I did find this chart with a carefully cherry-picked timeline:

Image

I am of course aware that performance eventually reverts to the mean; and it would seem we are statistically overdue (but not assured!) that will happen.

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Re: Newsletter recommending inverse ETF for 2019

Post by Random Musings » Sat Dec 22, 2018 9:43 pm

aednichols wrote:
Thu Nov 29, 2018 1:18 pm
With respect to forecasting a bear market, there are always a lot of wrong calls in the investment letter business. Is this guy/gal 100% confident of a bear market, and if they are, are they extremely low in equity exposure or even net negative with this inverse ETF?
The same newsletter predicted a bear market in 2016. The authors don't put a number on the probability; they present pages and pages of technical analysis and "proprietary indicators", which I find incomprehensible and do not trust - however, Dad does and has followed the advice for years.

It is actually quite hard to evaluate the performance of the portfolio, they do not publish numbers anywhere I could find; I did find this chart with a carefully cherry-picked timeline:

Image

I am of course aware that performance eventually reverts to the mean; and it would seem we are statistically overdue (but not assured!) that will happen.
Any update to what your Dad did? So far, the hedge would have helped. I wonder if this newsletter writer has gotten more bearish?

RM

RM
I figure the odds be fifty-fifty I just might have something to say. FZ

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Re: Newsletter recommending inverse ETF for 2019

Post by aednichols » Thu Dec 27, 2018 7:43 pm

Yes, he did buy SH. We discussed it and I sent him the Bogleheads wiki page about how inverse funds decay. I did not notice at the time that the ER is 0.89%.

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Re: Newsletter recommending inverse ETF for 2019

Post by HEDGEFUNDIE » Thu Dec 27, 2018 7:54 pm

aednichols wrote:
Thu Dec 27, 2018 7:43 pm
Yes, he did buy SH. We discussed it and I sent him the Bogleheads wiki page about how inverse funds decay. I did not notice at the time that the ER is 0.89%.
Congrats to your Dad, he probably has a higher balance now than if he didn't buy it.

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Re: Newsletter recommending inverse ETF for 2019

Post by aednichols » Thu Dec 27, 2018 8:20 pm

Yeah, I told him that while I still don’t agree with the strategy, it was a good call.

In the last month SH is up 6.8% while VOO is down 7.5%, which I believe illustrates the longer term drift that inverse funds exhibit (and one month is not a long time by investment standards!).

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Re: Newsletter recommending inverse ETF for 2019

Post by second-guesser » Thu Jan 10, 2019 4:00 pm

In reference to the inverse S&P EFT symbol SH, I noticed that Vanguard Brokerage is not permitting trades of SH or any leveraged or inverse ETT's or mutual funds after January 22, 2019. No explanation on notice , simply a toll free number posted if one has questions.

S-G

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Re: Newsletter recommending inverse ETF for 2019

Post by nisiprius » Thu Jan 10, 2019 4:36 pm

The important question is whether your dad understands what these inverse ETFs are, and how they behave. If he does, fine. But if he is buying them on the basis of a newsletter recommendation, he may not. If all he knows is that "they go up when the stock market goes down," he doesn't understand them well enough.

The first point is to urge him to read the FINRA alert on Leveraged and Inverse ETFs: Specialized Products with Extra Risks for Buy-and-Hold Investors. FINRA concludes:
As with all investments, it pays to do your own homework. Only invest if you are confident the product can help you meet your investment objectives and you are knowledgeable and comfortable with the risks associated with these specialized ETFs.
The second point is that it doesn't make sense to hold, say, an inverse S&P 500 ETF if you are already holding an S&P 500 index fund in the first place. At best all that it does is cancel out or subtract some of what you are already holding. If you want your portfolio to move less than the market moves, the obvious way to do this is to cut down on the percentage of stocks you are holding. If you own stocks, and you feel a strong conviction that the market will go down next year, and you want to take act on your intuition--the obvious action to take is simply to cut down your stock allocation. It makes no sense to buy something extra for the sole purpose of erasing or counteracting some of what you already own. Just sell some and own less. He should be able to explain clearly why he is adding an inverse stock ETF to his portfolio, instead of just selling some of his stock holdings.

The third point is: make that that for gosh sake, read the ETF's description and understands at least the basic descriptive paragraph.

The ProShares SH ETF is a familiar inverse S&P 500 ETF, maybe the biggest? ($2 billion in assets). If that happens to be the one he is considering, make sure he at least reads the fund's description on the web--or, at least this paragraph:
This short ProShares ETF seeks a return that is -1x the return of its underlying benchmark (target) for a single day, as measured from one NAV calculation to the next. Due to the compounding of daily returns, ProShares' returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period. These effects may be more pronounced in funds with larger or inverse multiples and in funds with volatile benchmarks. Investors should monitor their holdings as frequently as daily. For more on risks, please read the prospectus.
Let me unpack a couple of things. Remember, this is basic-basic--this is all directly from the ETF's short summary paragraph on its own web page.

"for a single day"--It gives you the opposite S&P return for a single day. For periods of time that are not a single day, it does not necessarily double them. If the S&P goes down 10% in one day, the ETF will go up 10% during that same day, yes.

"ProShares' returns over periods other than one day will likely differ in amount... from the target return." If the S&P goes down 10% in one year, the ETF does not automatically go up 10% in that year. It will go up by a different amount. Maybe quite different.

""ProShares' returns over periods other than one day will likely differ in amount and possibly direction." Yes. You read that right. Over a day, SH will go up when the S&P 500 goes down. Over longer periods of time, especially times of high volatility, maybe not. The stock market might go down and SH might go down anyway.

"Investors should monitor their holdings as frequently as daily." Again, this is not my opinion, this is what the fund company says investors "should" do. Your dad should be prepared to look at his SH holding every day. ProShares is telling you that investors should not buy this fund if they are not prepared to do that.
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