Search
Generic filters
Search in excerpt

An ETF for every investor.

CASH

Horizons High Interest Savings ETF

Price
$50.03
$0.00
0.00%
NAV
$50.0050
$0.0050
0.01%

Benchmark

Fixed Income

Fact Sheet
Learn more about CASH

QQCC

Horizons NASDAQ-100 Covered Call ETF

Price
$4.71
$-0.09
-1.88%
NAV
$4.6947
$-0.0318
-0.67%

Active

Covered Call

Fact Sheet
Learn more about QQCC

HRAA

Horizons ReSolve Adaptive Asset Allocation ETF

Price
$11.13
$0.01
0.09%
NAV
$11.1572
$-0.0018
-0.02%

Active

Corporate Class – Alternative

Fact Sheet
Learn more about HRAA
Explore All Products
Search
Generic filters
Search in excerpt
Back to Media

ETP Compounding in Focus – Part 1

ETPCompounding.jpg 

BY: HANS ALBRECHT, CIM®, FCSI, VICE-PRESIDENT, PORTFOLIO MANAGER AND OPTIONS STRATEGIST, HORIZONS ETFS

August 16, 2017

When talking about volatility exchange traded products (“ETPs”) I always like to highlight both their advantages and disadvantages. These products can work well, but because they are very path-dependent, their ultimate performance will vary based on the underlying index upon which they’re constructed.

Inverse and leveraged ETPs, in particular, are affected by what’s called the ‘reset leverage compounding effect’. When markets (and indeed volatility gauges themselves) are volatile, the daily cut can hurt performance.

A simplified example would work like this:

• Suppose the underlying short-term volatility index (“the Index”) moves up 10% from a value of 100 to a value of 110.
• The single leveraged long ETP should also move up by 10%, but the single leveraged inverse ETP would move down 10%; the value of the single leveraged inverse ETP would go from 100 to 90.
• Let’s assume the Index then moves back down by 9.09%, which gets it back to its starting point of 100.

The inverse ETP however, since it tracks the Index, moves up a similar 9.09%, but only up to 98.18. Even though the Index has returned to where it started, the inverse ETP’s price is now lower than where it began in our example. So the ‘volatility of volatility’ in this market has cost us 1.82 of value in our inverse ETP. One way to think of this is that realized volatility hurts us. Therefore, these inverse products are in a sense short implied volatility, but also short realized, or actual, volatility.

Index Price Index % Move Inverse ETP Price Inverse ETP % Move
100 0% 100 0%
110 10% 90 -10%
100 -9.09% 98.18 +9.09%

 

Index Cumulative move: 0%
ETP Cumulative move: -1.82%

Movement hurts their performance. Now imagine a market in which a great deal of equity index movement is causing large swings in both directions for the VIX and VIX futures. The inverse volatility products will continue to get hurt from this ‘short realized’ movement until markets calm down.

In my next blog, I will discuss how path dependency can actually help performance in certain types of markets (like the one we’re in now).

The views/opinions expressed herein may not necessarily be the views of Horizons ETFs Management (Canada) Inc. All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.

Get Horizons insights in your inbox

Please select whether you are an…*
* Indicates required field

Related Posts

At Horizons ETFs, we believe in education as empowerment. We endeavor to equip Canadian investors with the knowledge and tools they need to navigate the investing world. From the ETF basics to more complex topics like how our suite of inverse and leveraged funds work, our comprehensive learning library aims to be accessible for all investors, from beginners to experienced traders!