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Has anyone researched or purchased Horizons Beta Pro Financial Bear ETF (HFD-T) or any other "Bear" ETFs? With the recent run up in Cdn financial stocks and the stock market in general, I am beginning to feel very bearish and think that the 6 week run up should take a breather soon. Is anyone else feeling bearish and if so, what types of investments are you considering?
 

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Has anyone researched or purchased Horizons Beta Pro Financial Bear ETF (HFD-T) or any other "Bear" ETFs?
I'm not a big fan of leverage etfs...high costs, index tracking issues and amplified loses. They aren't that good for long term plays but if you are just looking at the short term then go ahead.
 

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I agree with MFD,

If you're using these as short-term trading positions then they work very well, but they track their intended index very poorly over a long period of time. I wouldn't hold one longer than a week unless I was using it as a hedge against something significant in my portfolio and could deal with the tracking error.

The runup in financials has been impressive, but one could almost argue that they were unfairly beaten down by fear as investors exited positions in waves. All they've really done is come back to a valuation where I felt they should have been before: PE under 15, yield above 5% to imply the current risk of loan losses and write downs.
 

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Jason Zweig wrote about the side-effects on leveraged ETFs in his Wall Street Journal column:

Will Leveraged ETFs Put Cracks in Market Close?

New research suggests that on days when the indexes make big moves, leveraged exchange-traded funds could trigger a trading cascade, turning the market close into a buying or selling frenzy.

To be fair, there has been no meltdown -- yet. But as the financial crisis has intensified since last fall, the final hour of the trading day has felt rougher than ever.
 

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I just caught Dan's report yesterday. I found it interesting but cannot use ETFs for my clients so it was more of an educational piece for me. As for your blog entry Mr. Chevreau, you seem to take exception with Beta Pro's "paid PR campaign" as you call it. I didn't follow it closely but I recall lots of people from Al Rosen to (more recently) The Globe and Mail to FAIR Canada and all sorts of other commentators criticizing Beta Pro.

While it doesn't come out and say it, that report seems to suggest that Beta Pro's disclosure is up to snuff. If it is, do we blame the sponsor for letting people down or the disappointed investors for not researching the investments they bought? I admit to being biased because I'm a financial advisor in Ontario (hence the alias) and have often experienced a client forgetting not only something we've discussed a few times but something I put down on paper for them to take home.

So do you have a real beef here or are you simply asking the provocative question for discussion purposes or to play devil's advocate?
 

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That statement that you can't buy ETFs for clients screams out for elaboration. I presume you're in the MFDA channel only? All I'm saying -- and I thought the blog entry was clear on this -- is that paid-for analysis makes it tough on otherwise independent consultants to shed light on financial products as dispassionately as they might if money were not part of the equation. Dan's long disclaimer indicates his discomfort even though in this particular case, he clearly felt he'd have said much the same thing even had he not received the assignment.

The real hope the payer harbours is that the credibility of the consultant so carefully built up over the years in their truly independent analysis will also apply to the paid-for research -- and that web and media outlets will pick up the item largely based on that previously established reputation.

In the vernacular, it's hard to suck and blow at the same time.
 

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That statement that you can't buy ETFs for clients screams out for elaboration. I presume you're in the MFDA channel only?
Scream away. I am in the MFDA channel but would it make it any better if I was an unlicensed advisor simply charging for advice or an "independent review"? I have access to and use some passive products. My dealer is smallish but it means I get to do what I want as long as I follow the rules (of the dealer and the regulator). In other words, some dealers wouldn't let me use some of the cheap active funds I like to use for my bigger clients. My dealer gives me that flexibility. Any other questions about my lack of ETF access?

Dan's long disclaimer indicates his discomfort even though in this particular case, he clearly felt he'd have said much the same thing even had he not received the assignment.
So damned if you do and damned if you don't, huh? If the disclaimer had been in 8pt font and buried at the bottom of the last page, you'd give him crap for burying it. He puts it in regular sized font at the beginning of the report and he lines up with Beta Pro for protesting too much? C'mon Jon, you said yourself that he's one of the most trusted of media sources. Which is it?

The real hope the payer harbours is that the credibility of the consultant so carefully built up over the years in their truly independent analysis will also apply to the paid-for research -- and that web and media outlets will pick up the item largely based on that previously established reputation.

In the vernacular, it's hard to suck and blow at the same time.
So, you're not only questioning why Beta Pro is paying for this external research but whether these "independent consultants" (Dan in this case) can do paid for research and maintain their integrity? It's a good question. But I read through that report and I have to say that it wasn't the most flattering report I've read. The only thing missing from it that I've seen in Dan's other articles is a strong opinion.

Jon, your blog said that you quoted from the executive summary. Did you actually read through the whole report?
 

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Yes, I read the whole thing but my intent was not to report on the content -- you and anyone can do that by clicking on the link -- but to comment on what's really going on here. I didn't say Dan protested too much, it's the firm that commissioned the study. And as my blog touched on near the end, there appears to be more going on here than meets the eye. I suspect it involves potential legal liability and wanting to establish how hard it tried to properly educate the public. And I'm not saying that's not a good thing. BGI also conducted a full-day seminar which I reported on and that's commendable too.

But check this link:

http://online.wsj.com/article/SB124961014025313309.html
 

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I looked at all the links above without finding any that show to the layman what exactly is happening in these funds. Dan Hallett came closest but still obscured it.

The result of no one showing a simple comparison of single-long vs double-long is that the WRONG advice is still being propagated. Yes, people are saying "only for short term holds". But that is wrong. The advise should say clearly "only for one day holds".

Underlying........................................Dbl Long..................................
Return.........calc...................$100........Return................calc....................$100
-10%.........100*(1-0.1)=........$90.........-20%...............100*(1-0.2)=............$80
+11.11%.....90*(1+0.1111)=....$100.......+22.22%.........80*(1+0.2222)=........$98

This two-day example shows how the double long can underperform a flat performance of the underlying security. The conclusion is that for any period longer than ONE DAY the leveraged ETF's performance is totally unpredictable and not comparable to the underlying AT ALL.

If you want a leveraged return, borrow your own money and buy twice the amount of the underlying. And accept the cost of debt and the risks of leverage.
 

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The result of no one showing a simple comparison of single-long vs double-long is that the WRONG advice is still being propagated. Yes, people are saying "only for short term holds". But that is wrong. The advise should say clearly "only for one day holds".

Underlying........................................Dbl Long..................................
Return.........calc...................$100........Return................calc....................$100
-10%.........100*(1-0.1)=........$90.........-20%...............100*(1-0.2)=............$80
+11.11%.....90*(1+0.1111)=....$100.......+22.22%.........80*(1+0.2222)=........$98

This two-day example shows how the double long can underperform a flat performance of the underlying security. The conclusion is that for any period longer than ONE DAY the leveraged ETF's performance is totally unpredictable and not comparable to the underlying AT ALL.
Um, did anybody look at BetaPro's own investor education piece (page 2) and the prospectus (pp 47-49)? I'm only guessing but maybe that's why additional reports haven't regurgitated this information. Also remember that these examples are extreme, deliberately, so that they nicely illustrate the impact of volatility.
 

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Bear ETF's do a really bad job of tracking over time as others have mentioned. If you really want to short the market buy some puts that expire next year or leaps. Just make sure to buy some that are not too far out the money. Or buy some gold!
 
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