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I agree with AIMster.
I have purchased these inverse ETFs from time to time with reasonably good success. However, and this needs to be emphasized, these were purchased as short-term trades only to make some quick profits.
And, these ultra-short ETFs were purchased only when the volatility was very mild; unlike what it has been since last fall. If one attempts to buy these in a volatile market he can live to regret his decision.
It is my opinion that these ultra-short inverse ETFs should be purchased only when the market has had a long extended bull run and the VIX has a reading below 13 or so.....a very overbought condition. I have never quite figured out how to post graphs and charts here, but if this link turns out okay you can see how these inverse ETFs would have performed if purchased when the VIX was down in low double digit numbers.
http://stockcharts.com/h-sc/ui?s=$VIX&p=D&yr=2&mn=0&dy=0&id=p23907460159
As AIMster says, the long term bias of the market is upward, so one should not become married to one of these ETFs.
JMHO.
Regards,
Ray
Here is some information which I found since I posted the first message. It looks like it has to do with the Preferred Shares failing at auction and possible consequences.
http://news.morningstar.com/newsnet/ViewNews.aspx?article=/BW/20080215005504_univ.xml
I don't have much knowledge about how closed-end funds go about arranging their leverage. I certainly did not know about this "auction" process for preferred shares. Looks like I have a lot to learn on this subject.
Ray
Just some general info being sought about leveraged closed-end income funds.
A few days ago some talking heads on one of the financial networks were discussing the credit crisis. They were saying that some closed-end mutual fund companies which sponsor these leveraged closed-end income funds were probably going to have trouble rolling over the leverage debt in each fund when due and, as a consequence, would probably have to pay higher interest rates for this leverage if it was available. They were saying this would probably force them to cut their payouts in the future. As I recall, the fund companies mentioned were Calamos, Eaton Vance and Nuveen.
From what I can see on ETFConnect it would appear that most of this leverage for the funds I researched is in the form of Preferred Shares, not borrowed debt. Am I correct in this assessment?
I was wondering what you guys thought about this possible negative situation and how it might effect the monthly distributions going forward.
Also, one of the leveraged closed-end income funds I have recently been looking at as a possible investment is the Nuveen Floating Rate Income Opportunity Fund (JRO). The ETFConnect website shows it has a current distribution rate of 11.87% and a discount rate of a minus -8.19%. It is showing that it has a leverage ratio of 39.64%. Are any of you invested in this fund? If so, what is your opinion?
Thanks for your opinions.
Ray
Hi Steve,
Those are some good thoughts and observations.
One thing I might add to this cash burn problem would be doing something that someone else here mentions from time to time; though I can't remember this morning who that person is (old age problem). Anyway, what one should do is to increase the SAFE Buy setting by 5% with each Consecutive Purchase. This keeps the purchase amounts reasonably constant and spaced further apart. Seems to me that this would help alleviate the cash burn situation somewhat and make calendar watching a useless exercise.
JMHO.
Of course, as you mentioned, one should not forget Rule #1.
Best regards,
Ray
Same to you and everyone else who reads and posts on this forum.
Ray
Hi Adam,
Another indicator you might give some consideration to is the Wilder Average Directional Index (ADX). This indicator gives not only the direction of the trend, but also gives the 'strength' of the trend's direction.
http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:average_directional_
Used in conjuction with the MACD this might give you a good feeling about your entry point.
Regards,
Ray
Thanks, K.
I am glad you were able to pick up on this. This feature of the PC remaining constant during sells, but with 'less shares' is basically what I was trying to recall. As I was reading these conversations about inflation and increasing Portfolio control because of one's conception about inflation I knew there that was something I noticed the first time I read Mr. Lichello's book, but I just could not recall what it was. Thanks for bringing this function of Portfolio Control to my recall.
Regards,
Ray
Adam, this website might be of some use....just not sure. It is the CEFA website. For each CEF it shows both an 'Income Only Yield' and a 'Distribution Yield (Market)'.
http://www.closed-endfunds.com/FundSelector/FundDetail.fs?ID=88195
I am not sure what effect capital gains would have. Nor am I sure if someone can really get a handle on whether or not the principal is being returned to you in the monthly dividend payouts just by looking at this website.
I could be wrong, but I believe that the ETFConnect website only shows the current distribution rate and does not break out the Income Only Yield from the total distribution.
I don't know if this helps you or not.
Regards,
Ray
I don't know if you are right or wrong on this subject. However, I have felt for some time that the current bull market that has been going on for several years was about to run out of steam. Therefore, I have become very defensive in my investing these past few months.
Have you ever read any of John Mauldin's free newsletters? In case you haven't read them, then I will say that he puts out a lot of information from various sources on the economy. He reported on the buildup in subprime mortgages and the possible consequences for a couple of years before it came to the public's attention. I could be wrong, but the last time I recall him expressing his opinion on the subject of a recession possibility was he thought that if a recession should occur it would be shallow and not too deep. I hope he is right on this subject. Even though I am retired and a recession would not effect my lifestyle very much, I hate to see younger folks lose their jobs and income.
BTW, I read your post this morning on the AIM bulletin board forum about how AIM lagged buying and holding the Dow 30 Industrials since 1940 because of the returns from reinvested dividends. That was very interesting and gave me some food for thought.
Ray
Aimster, thanks.
This article explains it very well. The "Cash is King" section and the "Fair Value in Action" example they used for April 12, 2000 are very clear to me. Basically it accounts for the borrowing costs in owning the future contracts versus owning the actual stocks, plus the amount of dividends that the futures contract owner forfeits and doesn't receive when it calculates the current futures contract value to the current index value.
I have referred the article to my son. Now when he listens to CNBC on satellite radio on his way to work he will understand what they mean when they use this term.
The section about how the arbitrageurs try to make a point or two out of its use is way out of my league. More power to them if they are successful in their efforts. To me it looks like it is a hard way to make a living.
Again, thanks a lot.
Ray
Tom, you are right about them filling the airtime.
I don't watch CNBC because I got the impression that they are always trying to be hip and "in the know" with some of the terms they throw around.....like they knew something the audience does not know.
By the way, the person who asked me if I knew how they were using the "Fair Value" term is anything but a trader. He is a buy-and-hold investor. He is my son and he is the principal financial officer and chief accounting officer for his company. He is a CPA. Therefore, he uses the term "Fair Value" a lot in his profession as he does the financial reports for his company. He says the company auditors are always challenging the "fair value" of the assets on his company's financial reports.
Since the way that the "fair value" term being used in conjunction with the S&P futures contracts was totally foreign to the way he uses it in his profession he was curious how it was being used on TV. Just thought I would ask this audience.
Regards,
Ray
Re: Fair Value for S&P futures contracts.
Someone recently asked me if I knew what the term "Fair Value" meant when it was used in conjunction with the S&P futures contracts. He said that before the market opens each day he will hear someone say on CNBC that the S&P futures contracts are at a certain value. He will then hear that person say that the Fair Value is, for example, a plus +2 or a minus -2. He asked me if I knew what they were talking about when they talked about "Fair Value" in this context.
I told him I had no idea what they were talking about when they used the term in this context. I told him that I had always heard that "fair value" meant what a willing buyer would pay for something from a willing seller. I looked at some different investing dictionaries, such as Investopedia, to see how the term was being used when used with futures contracts and was unsuccessful in finding such a definiton.
Does anyone know what "Fair Value" means when it is being used in conjunction with the S&P futures contracts?
Thanks,
Ray
Good question. I have thought a lot about this question in the past. Maybe someone more experienced in AIM can give us an answer to your question.
Ray
Hi Takr,
I agree with you. It is sometimes easy to forget how much emotion enters into the entire investing equation....probably more than the math aspect, IMO.
That is what I love about AIM. It mostly takes the emotions out of my investing. Where I have failed in the past is usually when I let my emotions take over my investing decisions. I used to stress out watching market declines. It is strange, but now I almost look forward to market declines as much as I do to market advances. I just wish I had stumbled upon Mr. Lichello's book 30 years ago when it was first printed. I probably would have saved myself a few headaches and had a few more nights of restful sleep.
Regards,
Ray
Hi Tom,
You have been using the AIM method a lot longer than I have, so you have gained a lot of information over the years about the best way to make the best returns.
I just took my profits when the formula told me to. I haven't used a moving average or any other indicator in addition to AIM. At the present time I am only using the basic AIM algorithm with a few modifications.
Thanks for the information.
Regards,
Ray
Hi Toofuzzy,
You responded to Clive's post, but began your post with the salutation of "Hi Ray". Just thought I would pass this along.
Regards,
Ray
Hi Toofuzzy,
Here is an article I found about VIX options.
http://www.indexuniverse.com/index.php?option=com_content&view=article&id=1035&Itemid=28...
It seems that some institutions are trying to create an exchange traded fund or similar vehicle to trade on the VIX, but it is a difficult investment to create.
Regards,
Ray
You guys ain't going to believe this.
I bought CHY yesterday at $11.55 and $11.59. I just had my first AIM sell for $14.84. A return of 28.48%. In one day. This is a high yield fund?
Ray
Hi Toofuzzy,
AIM-HI was described as being set up with 10% Buy and Sell SAFE settings. The Minimum Transaction was set at 10% of the Stock Value. The Cash Account was set up at 20%, which equates to being 25% of the Stock Value.
If I were to do it I would at least change to Sell SAFE setting to 0% in this type of market.
One other thing I would consider in this market. That is, I would increase the Buy SAFE 5% with each consecutive buy.
I am glad you emphasized the word USUALLY. That was my impression about these type investments. Today seems to be the exception.
Thanks for your help with this.
Regards,
Ray
Thanks,
I had been thinking of doing an AIM-HI program with this particular fund since it is a high yield fund and pays a good monthly dividend. I have sufficient cash sitting on the sidelines in the event I burn through the account for this fund. However, your suggestion of starting with 30% cash (instead of 20%) and using a 10% SAFE and 10% Minimum Transaction amount sounds even better to me.
Ray
Tom: Re: CHY
Hi Tom,
For someone setting a new account in CHY, what percentage would you recommend for the Cash Account? You have a lot of experience with this fund. Its current yield is 11.31% as I am typing this.
Thanks,
Ray
Thanks for the reply.
One of the things on that page about causing a CEF to trade at a discount caught my eye. It was the part about a CEF holding a large amount of "unrealized gains". I had never given that any thought, but I can see how this might cause a particular CEF to appear unattractive to a buyer. I suppose after this nice 4 plus year bull market run this could be a problem with a lot of CEFs.
Regards,
Ray
Got a question about CEFs premiums/discounts in general.
The CEF share price will differ above or below the value of the underlying stocks in the fund's portfolio (NAV) creating a premium or discount. So far, so good.
Now then, the portfolio manager charges expenses, etc. which adds a layer of expenses to the value of the underlying stocks (NAV). Therefore, it seems to me that any CEF where the NAV is trading at current value should always be selling at a premium.
Or, is my math off here?
Thanks,
Ray
Hi Toofuzzy,
Thanks for the tip on RNP. I will research it and possibly put it on my 'watch' list.
I would think that the consensus believes that the ultra 'short' ETFs, whether sector or broadly diversified funds, are a bad idea.
However, it seems to me that the idea of ultra 'long' sector ETFs was not addressed by any of the respondents. I should have been more specific that I was discussing the ultra 'long' sector funds when I talked about the fall, rise, etc. AIM-like volatility motion of a stock or ETF. I apologize for my lack of specificity.
I could be wrong, but to my knowledge these ultra ETF sector funds have been around only since this past January. There may have been some ultra sector open-ended mutual funds available before then. However, because of the trading restrictions placed on most open-ended mutual funds I was only interested in ETFs. With ETFs and stocks one can place limit orders....not so with open ended mutual funds.
Therefore, since these ETFs have been in existence only a very short period of time, then that is the reason why I asked if anyone had any experience with them. In re-reading my original post it appears that a lot of spaghetti was thrown on to the wall and that the message was not specific enough in the information it sought.
I did receive your private message, but since I am not a premium member I could not respond to it. I will say that I was previously aware of all the points you raised.
Regards,
Ray
Hi Toofuzzy,
You have given me a lot to think about and that is what I will be doing the next few days. Thanks for taking the time to comment on my thoughts.
Regards,
Ray
Hi aim hier,
I agree that this would not be a good concept with some funds that represent the broadly diversified overall 'stock market'. However, my original post was concerned with some ultra long/short 'sector' funds.....REITs.
I could be wrong, but I think that 'cyclical sector' funds could give the AIM concept of the fall, rise, fall, rise, fall, rise, etc. motion that enabled Mr. Lichello to develop his AIM formula in the first place. That is the 'juice' that he mentioned and what we are all seeking.....'volatility capture'. Especially cyclical sector funds that can go 200% long or short. They may not be good "pairs" candidates for previously mentioned reasons, but that does not necessarily make them poor AIM candidates, IMO.
Regards,
Ray
Thanks, Toofuzzy.
I now remember reading something about the inperfect opposite correlation between ultra longs and shorts. I also remember having a prospectus around here in my home office somewhere from either Rydex or Profunds that also explains how that happens. It has to do with having to make up a larger percentage to the upside to compensate for prior declines. An example is that it takes an 11% increase to make up a 10% decrease.
REITs have had a very large increase since the late 90s. I am just not sure how far they will decline from here before they bottom out. Personally I have never been able to call a bottom. That is why I have been thinking about sticking my toe in the pond and see what happens. I might do something like Adam mentioned a couple of months ago. As I recall I seem to remember that he mentioned something like using LD-AIM to buy X amount and then use a highly leveraged amount of Virtual shares. He also mentioned that he would sell all of the shares at the first indicated Sell. That might be a good way to approach this sector. I need to give it more thought.
Regards,
Ray
Re: Ultra-Long, Ultra-Short Sector ETFs.
I was wondering if any of you have invested in any of these 200% long, or the 200% short sector ETFs from Proshares. The reason I am asking was that I have been researching the real estate sector ETFs. They have fallen a good bit since the spring. I thought this might be a good time to stick my little toe in the water with this sector. I came across these sector funds on steroids from Proshares.
The ultra-long REIT fund’s symbol is URE. It has dropped from a high of $75.26 in February, 2007 down to $48.87. It has very thin trading volume. Its average 10 day average volume is only 9,388 shares and its 90 day average volume is only 6,050 shares.
http://stockcharts.com/h-sc/ui?s=URE&p=D&yr=0&mn=6&dy=0&id=p67432984663
Its mirror counterpart is the ultra-short REIT fund. Its symbol is SRS. It has experienced some good trading volume. Its average 10 day volume is 266,122 shares and its 90 average volume is 187,063. It looks like the hedge funds might have had a big part in its heavy trading volume. It has a low of $63.54 in February, 2007 and a recent high of $94.59.
http://stockcharts.com/h-sc/ui?s=SRS&p=D&yr=0&mn=6&dy=0&id=p67432984663
These look like they might be good AIM candidates because of the volatility inherent in each fund. They might also be good “pairs” candidates. I haven’t checked any other sector ETFs from Proshares, but I am sure I will find similar type volatility movements.
Has anyone invested in any of these “ultra” sector ETFs yet? If so, what do you think of them?
Thanks,
Ray
Re: No-Down AIM. I have what may seem to be a dumb question.
Suppose a stock someone likes is within 10% of its 52 week high or its all-time high price. Would the AIMer set up his/her No-Down AIM program with the current price or with the high price? Or, is that just a judgment call depending on how low he/she expects the current price of the stock to go?
Ray
Hello Clive.
I see your point. I thought you were speaking of the long-term; not just a few months in duration.
I expect that from a pure buy-and-hold aspect then the point at which the returns merge and coincide are strictly a matter of data mining which starting and ending dates one wants to use to determine that.
I have now owned three of the ultra ETFs for several months. I am pleased with the results. My purpose in purchasing them was not to buy-and-hold per-se, but to obtain more AIM directed transactions because of their increased volatility than I would have obtained from normal mutual funds. Someone once remarked that if one wanted a good mutual fund suited to AIM then the mutual fund should be rated an "A" in a bull market and rated as an "E" or "F" in a bear market. The ultra funds seem to have those traits. I think Mr. Lichello referred to this trait in his book as being "juice".
Best regards,
Ray
Hello Clive,
Somehow I seem to be missing what you are saying, or else I am otherwise confused by what you mean when you say "It would appear that the twice scaled based Ultra (SSO) doesn't actually provide twice the longer term benefit as many expect, instead the daily price motions are just doubled whilst longer term average gains tend to align with the underline non-scaled S&P."
The way I understand what you are saying is that over a long period of time the Ultra index fund's returns will be closer to the regular index fund's returns instead of obtaining the goal of returning twice as much as the index fund returns.
If I understand correctly that this is what you are saying then it appears to me that the record does not conform to your theory.
I just did a PerfChart on the ultra S&P 500 index fund from Rydex (RYTNX) and compared its returns to the popular S&P 500 index fund from Vanguard (VFINX). I went back to what is considered to be beginning date of our current bull market--October 8, 2002. Through the close of trading this past Friday the Rydex dynamic ultra fund (RYTNX) has gained some 204.24%. On the other hand the chart shows that the Vanguard index fund (VFINX) has gained 99.25%.
It appears to me at least that the Rydex ultra fund has performed up to its expectations of gaining twice as much as the underlying index.
Maybe I did not understand your comment above the way you intended it to be meant.
Regards,
Ray
Hi AIMster.
I could be wrong, but I am guessing that what probably happened to you has happened to me in the past with these newer StockCharts charts (say that fast three times.
Whenever I have prepared a special chart that I was going to send to someone or post somewhere I had to click on the tab just beneath the chart that reads "Linkable Version". If I did not click on that tab once the chart was prepared, then my default chart was linked and not the chart I was trying to send.
OTOH, you could have done that step in linking your charts and this error occurred because of something else.
Regards,
Ray
Has anyone given any consideration to AIMing any of the inverse bear short funds or ETFs? It seems to me with nearly all of the major indices (except the NASDAQ) flirting with or near their all time highs that this might be a good time to set up some long-term AIM by-the-book or LD-AIM programs. That, plus the fact we are now coming upon the “Sell in May and walk away” time of year. In the past I have bought the new ultra-short ETFs from Proshares as short-term trades to take advantage of some market fluctuations, but it seems to me that now might be the time to set up some permanent AIM programs with some inverse funds. What do you guys think?
Ray
I have used the Proshares "Ultra" long and short ETFs for short term market moves (200% long or short the underlying index being tracked). I have not held any of them long enough to set up a long term AIM program because of the current highly valued market. I am basically waiting for a substantial market decline before setting up any long term programs. I expect that these ETFs would be very good investment tools to use with AIM techniques because of their volatility when compared to long only or short only ETFs or mutual funds.
Ray
Hi Adam,
I like your thinking on this subject.
Ray
Hi Ken,
That is one I do know. That was Dick Fabian. He had his readers go to 100% cash, or to 100% mutual funds based upon a 39 week moving average. For some reason I think that his son is now publishing that newsletter under another title, but I could be wrong about that.
Regards,
Ray
Here is a link to an investing newsletter that is produced by a Bill Donoghue.
http://www3.marketwatch.com/store/products/proactive_fund_investor.aspx
I can only assume it is the same person.
Best regards,
Ray
Hi Tom....I did make an LD-AIM purchase this morning of USD, which is the Proshares Ultra Dow Jones US Semiconductor Index ETF. I had to keep checking the price frequently before placing my Limit order because the bid/ask spread seemed unreasonable when trading began this morning. Eventually there was enough trading activity in the ETF to create a reasonable bid/ask spread.
I am looking forward to the volatility in this ETF. Hopefully it will create some frequent transactions.
Regards,
Ray
I am sure that most of you are aware of the new Proshares. For those who aren't here is a link to their ETF products page.
http://www.proshares.com/funds
It would seem that these are really useful products for those who do not want to invest in individual stocks. These Ultra and Ultra-Short products should provide the volatility necessary to obtain more frequent transactions than one would get with normal index funds.
I recently set up some LD-AIM account positions in two of their ultra-short ETFs.....SDS and MZZ. I did this as a hedge against a portion of my long positions.
One thing I have noticed is that a lot of these ETFs do not yet get much trading on a daily basis. This current lack of liquidity gives me pause on purchasing them at this time. That could change in the future as these products become more popular with the investing public.
Best regards,
Ray
Thanks for the explanation about FOREX and using margin. That was a very informative post.
Ray