Inverse ETFs

ETFs have grown tremendously since the launch of the first ETF in 1993. The chart below is from BlackRock’s iShares website and illustrates ETF growth.

The most notable benefits of ETFs are their trading flexibility. ETFs are priced throughout the trading day, and because ETFs trade like stocks on an exchange, you can buy them on margin and place limit and stop orders. You are able to trade it like a normal stock, but it is a package of 500 or more stocks. Trading flexibility, however, can be a double-edged sword. The ability to trade anytime is a benefit to busy investors and active traders, but that flexibility can draw some people to trade too much. As John Bogle, Burton Malkiel, Warren Buffet, Benjamin Graham, and other long-term investors have all published via various mediums, a high turnover of a portfolio increases its cost and reduces returns. In just 20 years, ETFs have gone from relative obscurity to accounting for 40% (as of 2011) of daily trading volume. However, these products do exactly what they are supposed to do: reflect market sentiment. In my opinion, I believe regular investors can benefit greater by following a more conservative, time-tested strategy, such as investing in an index fund by means of dollar cost averaging.

One of the most interesting ETF products is inverse ETFs. Inverse ETFs short the index it is tracking. For instance, Direxion Daily Large Cap Bear 3X Shares (NYSEARCA: SPXS) moves opposite the S&P. The fund seeks daily investment results of 300% of the inverse of the performance of the S&P by investing in futures contracts, options on securities, indices and futures contracts, equity caps, swap agreements, forward contracts, short positions, and reverse repo agreements. For example, today the S&P was down 1.1% and the SPXS was up 3.3%. If tomorrow the S&P is up 0.5%, the SPSX will be down 1.5%. Moreover, if the S&P follows with a 2% drop, the SPXS will rise 6%. Keep in mind that not all inverse ETFs seek an investment result greater than 100% and some will move exactly 1-1 opposite of its respective index.

Inverse ETFs provide an easy means for a regular investor to hedge their bets by indirectly investing in complex derivative products. However, as mentioned above, this increased flexibility can cause some traders to trade too much.

What are your thoughts on inverse ETFs?

Bank Consolidation: For the money, duh!

Why are small business and retail depositor banks being created? To make money, duh!

Steven Syre, Boston Globe columnist, published an opinion piece today on community banks in Massachusetts that are lining up to go public. Banks rolling out plans for the public market include:

• Beverly Bank, which has four branches and oversees $324 million worth of assets.
• Melrose Cooperative and Pilgrim Bank of Cohasset, which together hope to raise about $45 million.
• The parent company of East Boston Savings Bank, which sold a minority interest to the public in 2008, plans to go all-in by the end of 2014.
• Blue Hills Bank, which customers knew as Hyde Park Savings for more than a century, hopes to raise nearly $240 million by going public.


Taking a company public can have many fundamental and underlying reasons, but (in my opinion) bringing in massive profits is surely at the top of the list. Lots of people make big money in the process of an IPO – including the executives who took the bank public. And a lot of people make big money in the process of M&A – including the executives who took the bank public. A lot of small, regional banks are acquired by larger banks shortly after their public offering, and according to a new analyst report, M&A activity among regional banks is off to a better start this year contrasted with the prior two years. A way for struggling banks to increase shareholder value is to hitch their wagon to the star, serving as a way for management of the local bank to bring in wads of cash. 28 "whole-bank" deals — those in excess of $5 million — have been announced during the first quarter. That compares to 24 during Q1 2013 and 22 in Q1 2012 (Investor’s Business Daily). M&A activity does not drive this, but rather it is a byproduct of a bull-attitude toward the financial services industry. The fact that there are a lot of banks getting ready to go public is an encouraging sign for our economy, and the line forming at the moment suggests that many bankers believe the economy of the next several years will be strong enough to grow and avoid serious loan problems (Boston Globe).


References:

http://www.bostonglobe.com/business/2014/03/31/community-banks-line-public/gkvGKzMtkUxqkZOQrnevfJ/story.html http://news.investors.com/business/033114-695245-regional-banks-manda-activity-rises-in-2014.htm