Municipal Bonds Trading in ETFs
(Aug 2013)
About a month ago, we spent a full week highlighting research conducted at our firm that shows the degree to which investors are harmed by excessive markups in municipal bond trading. In the paper, our colleagues argue that low-cost improvements in disclosure requirements could largely eliminate these transfers of wealth from taxpayers and investors to the brokerage industry.
After the research was completed, we began thinking about other ways investors gain exposure to municipal bonds. For...
Why Banks Are Storing Physical Commodities, and Why it May Matter
(Jul 2013)
Physical commodities -- barrels of oil, bars of gold, bushels of wheat, etc. -- are used for a variety of industrial purposes, but can also be bought and sold in financial markets. Most commodities trading involves futures contracts, as trading the physical commodity itself involves transportation and storage costs. Traditionally, banks who traded commodities were only allowed to deal in derivatives such as futures contracts, rather than dealing in the physical commodity itself.
But since the...
VelocityShares' New Volatility ETFs
(Jul 2013)
You've heard it here before: hedging equity exposure with volatility derivatives is very tricky.
While the CBOE Volatility Index (VIX) and the S&P 500 are negatively correlated suggesting a possible hedging opportunity, you cannot invest in the VIX itself, you have to invest in derivatives (futures or options) linked to the VIX. The simple fact is that this indirect exposure to the VIX does not behave like the VIX itself, making it in the end a rather poor hedge to equities .
But issuers of...
Structured Investments Linked to Proprietary Indices
(Jun 2013)
Structured products are often linked to well known indices like the S&P 500 or the Dow Jones Industrial Average, but recently it has become more and more common for banks to issue structured investments linked to proprietary indices that they create themselves. The use of proprietary indices (also known as 'self-indexing') has begun to arouse suspicion from various sources and so we thought we'd take a step back and talk about the issue for a moment.
Structured products linked to well-known...
Alternative Ways to Gain Municipal Bond Exposure
(Jun 2013)
We've been covering municipal bonds, with a focus on markups, this week on the blog. So far we've discussed some basics, given an example of an excessive markup and introduced SLCG research on excessive markups in municipal bonds . Given that retail investors may be charged excessive markups when purchasing municipal bonds directly, it may make sense for them to purchase municipal bonds indirectly.
Jason Zweig has written a great follow-up to his coverage of the muni markups issue with a...
Dodging Hedge Fund Requirements: The Case of Mariner Access
(Jun 2013)
Nowadays, there are several ways that retail investors can purchase risky investments which would typically be considered unsuitable. For example, many exchange-traded funds (ETFs) use derivatives to offer investors access to risky asset classes (such as CDOs) or complex options positions (such as covered calls). Since ETFs can be bought and sold like any other listed stock, essentially any investor can now take covered call positions regardless of her understanding of options. There is even...
Options Strategies Embedded in Exchanged Traded Products
(May 2013)
In theory, exchange traded products (ETPs) can be linked to almost any underlying asset, including derivatives. While many ETPs are linked to portfolios of bonds or stocks, some are linked to portfolios of futures contracts, which we have discussed at length before. Bill Luby at VIX and More has written a couple posts on ETPs that are linked to portfolios of options, which are gaining some traction with investors. As usual, we greatly enjoyed Bill's posts and thought we'd explain some of the...
Equal Weighting versus Market Capitalization Weighting
(Apr 2013)
We often hear about different stock market indexes in the same breath: on the evening news, you might hear that 'the Dow was up half a percent, the S&P gained three quarters of a percent, the NASDAQ was down a tenth of one percent'. While it may seem that these indexes tend to move together on most days, there are important differences between equity indexes. The one we hear about the most is that they are composed of different stocks: the Dow Jones Industrial Average tracks only 30...
Do ETFs and Mutual Funds with Higher Fees Outperform?
(Apr 2013)
There was a great comment on our post about FINRA's Mutual Fund Expense Analyzer.
Is there a positive correlation between fees and gross returns? In other words, are investors who pay higher fees compensated by higher returns?
On the one hand, one might expect that in order to garner high fees, a fund would have to earn higher returns; but on the other, it may be the case that higher fees simply erode profits and yield lower total returns.
We looked at data provided by Bloomberg on all...
Are ETF Flows Costly to ETF Investors?
(Apr 2013)
Exchange-traded funds (ETFs) are often lauded for their ability to efficiently create or redeem shares in response to changes in demand for the fund (known as fund flows). However, new research suggests that some ETFs that hold international securities may face transactional frictions that prevent them from tracking their benchmarks as well as other ETFs.
When there is an imbalance between supply and demand for an ETF, authorized participants (APs) create or redeem shares of the ETF to...
