Investing in ETFs

OmegaTrader · 1 October 2017

I suppose their is alot of irony in the passive investing /etf debate.

The main purpose of an etf is to be passive but more you look into it the more complicated it gets-further down the rabbit hole. Logarithmic nature of returns, volatility, do you use a derivative like futures,cfd's or options, do you borrow on margin or against your house or do you use a vanilla etf or a geared etf. What is the ideal position sizing? How much gearing? What is the opportunity cost of cash?How much cash do I hold? What is the tracking error. How much do I diversify? Do I hedge? What are the taxation benefits/costs.

It can do your head in. Not too mention that the whole basis or passive investing is the mantra that in the long term that asset prices will go up. This has not happened in every country around the world and therefore an assumption or in reality a bet on the future of Australia.

I remember years ago a finance lecturer when I was at uni said verbatim, I just buy the top 20-30 stocks and a few small caps here and there, then I look at it every 3-6 months and adjust the portfolio slightly. I can't justify the time, complexity and effort of the other options and also can't justify the fees.

and of course THIS IS NOT ADVICE

my two cents.

drequejo · 1 October 2017

rb250660 said:
Is this for the US markets or ASX drequejo?

US market

drequejo · 1 October 2017

OmegaTrader said:
I suppose their is alot of irony in the passive investing /etf debate.

The main purpose of an etf is to be passive but more you look into it the more complicated it gets-further down the rabbit hole. Logarithmic nature of returns, volatility, do you use a derivative like futures,cfd's or options, do you borrow on margin or against your house or do you use a vanilla etf or a geared etf. What is the ideal position sizing? How much gearing? What is the opportunity cost of cash?How much cash do I hold? What is the tracking error. How much do I diversify? Do I hedge? What are the taxation benefits/costs.

It can do your head in. Not too mention that the whole basis or passive investing is the mantra that in the long term that asset prices will go up. This has not happened in every country around the world and therefore an assumption or in reality a bet on the future of Australia.

I remember years ago a finance lecturer when I was at uni said verbatim, I just buy the top 20-30 stocks and a few small caps here and there, then I look at it every 3-6 months and adjust the portfolio slightly. I can't justify the time, complexity and effort of the other options and also can't justify the fees.

and of course THIS IS NOT ADVICE

my two cents.

I have a basket of 15 ETFs. The system buy 2 ETFs and rebalance every month based on Volatility and Momentum so far the system is around 12% profit per year in average since 2007. Only one negative year 2012 with -2.7%. 2008 was a nasty year, the system made 8.3% but the DD was 25%. DD can be decreased by using a market filter. Monte carlo analysis show the system is robust.

I use this system as part of my portfolio with 10% of my capital. I trade the majority of my capital in options strategies.

drequejo · 1 October 2017

Sir Burr said:
Lots of info here about rebalancing monthly ETFs.
https://indexswingtrader.blogspot.com.au/

Use on Aussie or US ETFs but the number of US is huge compared to us. Idea is to have a variety that will cover various industries/markets/conditions.

Maybe I haven't found the magic ones on the ASX but for things I tested found US outperformed but not sure why. Thing with the US ETFs (for us) is covering the AUDUSD.

For covering you can use a forex position and rebalance every month or you can use the AUDUSD future, mini future or micro future depend on the capital of your account.
Or you can use a multi currency account (IB provide it) and you don't need to cover, IB lend you USD you pay and interest, I think now is 2.66%. Obviously covering currency has a cost that need to be considered before make any investment.

lenny · 2 October 2017

Hi drequejo,
Do you have a AUD hedge on atm?

Sir Burr · 2 October 2017

drequejo said:
Or you can use a multi currency account (IB provide it) and you don't need to cover, IB lend you USD you pay and interest, I think now is 2.66%.

Thanks drequejo.
Not sure about this: you don't need to cover with the muli currency account.

How does that work? If you buy US ETFs you would still need a futures contract or similar if you wanted a hedge?

drequejo · 2 October 2017

Sir Burr said:
Thanks drequejo.
Not sure about this: you don't need to cover with the muli currency account.

How does that work? If you buy US ETFs you would still need a futures contract or similar if you wanted a hedge?

IB account is multy currency, what means the currency you deposit in is kept.

If for example you deposit $10000 AUD and $10000 USD and 10000 EUR, your account would have EUR, AUD and USD until you convert it in the currency you want by using Forex FXConv.

The base currency you choose for your account is only a representation of the numbers in a currency it is only for showing the numbers in that currency. Ideally you have only one currency and you use the same as a base currency.

An example of how the IB currency loan works:

You have AUD in your account

You want to buy 10.000$ USD in SPY. For making the sample easy let’s assume you buy 10.000$ USD in SPY the 1st of the month and you close your position the 30th of the month

The 1st of the month IB lend you 10000$ USD for buying the SPY (You need to have enough AUD for covering the 10k USD)

Let’s assume at the end of the month you wing 10%, 1000 USD

When you close the position IB get back the 10k USD + Interest and you have in your account the initial AUD + 1000 USD.

The only capital is not covered is the money you win

I hope it is clear.

Dona Ferentes · 2 January 2021

Investors’ penchant for risk-taking has rejuvenated a volatile and sometimes dangerous group of exchange-traded funds.

Leveraged and inverse ETFs have raked in $16.3 billion through the first 10 months of the year, on pace to top 2008’s record haul of $16.7 billion, according to Morningstar. The funds use leverage to double or triple daily returns and sometimes offer investors a chance to profit off the inverse, or opposite, of an index’s move. Those features have proved popular in this year’s stock market rally......

Investors Pile Into Risky ETFs During Wild Market Rally

A penchant for risk-taking has rejuvenated leveraged and inverse ETFs, as investors hunting for bigger returns take bold gambits that have the potential for big gains and even bigger losses.

www.wsj.com

Garpal Gumnut · 4 January 2025

Some excellent posting by @Dona Ferentes on different ETF's today. A great resource for those who use "Betashares ETF". and "Van Eck ETF" Just do a search for those words to keep up to date or maybe find an investing idea.

Thanks.

gg

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