Not all futures based ETFs suffer from contango. Naturgal gas and VIX are two of the most dramatic, though. Holding VXX long term is a bad move. I have long term puts on this ETF and have realized significant gains since the beginning of the year. Your money is gone, and it unlikely to be recovered by continuing to hold, even if VIX spikes.
HNU Mistake
Ok people, I will admit right off that I made a mistake a few months back and now I could use some advise on my best option.
As you are likely aware, HNU is a Horizons bull ETF on Nat gas. (2x)
When I bought I just didn't do my DD to discover it is really only for very short term trading (ie: hold for a few days or weeks max.) due to volitility of NG and ETF rebalancing yada yada...
Anyway, I bought at $29.15 and of course it is half that now so I am down about $10k ... ouch!!
My question is what to do now? I expect NG to move higher some day but will rebalancing & volitility wipe out any & all possible gains? Should I take my lumps now or hold tight for another 5-6 months in hopes of cold weather or a huricane or whatever will move gas prices up?
Can my investment go to zero?
Any help would be appreciated!
As you are likely aware, HNU is a Horizons bull ETF on Nat gas. (2x)
When I bought I just didn't do my DD to discover it is really only for very short term trading (ie: hold for a few days or weeks max.) due to volitility of NG and ETF rebalancing yada yada...
Anyway, I bought at $29.15 and of course it is half that now so I am down about $10k ... ouch!!
My question is what to do now? I expect NG to move higher some day but will rebalancing & volitility wipe out any & all possible gains? Should I take my lumps now or hold tight for another 5-6 months in hopes of cold weather or a huricane or whatever will move gas prices up?
Can my investment go to zero?
Any help would be appreciated!
1 - 5 of 24 Posts
If a futures market is in backwardation, the opposite of contango (the future price is lower than the present/earlier prices), an ETF long those futures will benefit from rolling forward the futures contracts it holds. This can happen if, say, this year's corn harvest is poor and there will be a shortage of corn to feed livestock until the next harvest. You might see backwardation in that situation. The price will be high for futures maturing in the near future, and lower further out.
Not all futures markets are in contango by exactly the amount of the cost of storage. That is a limit on how steep contango can be, as it create arbitrage opportunities (speculators did this with oil in 2008 after the crash, storing oil in tankers), but because commodities are produced continually, it is not necessary to store everything that is sold in later futures contracts. Some of it is selling future production. This happens to be the case right now, as corn is in backwardation.
If you are curious about term structures of various commodities, check out this site:
http://www.hardassetsinvestor.com/w...-backwardation.html?showall=&start=1#wticrude
Currently, natural gas and brent crude are in backwardation, meaning that ETFs holding these commodities long are benefiting from rolling futures contracts (sell high and buy lower in the future).
Not all futures markets are in contango by exactly the amount of the cost of storage. That is a limit on how steep contango can be, as it create arbitrage opportunities (speculators did this with oil in 2008 after the crash, storing oil in tankers), but because commodities are produced continually, it is not necessary to store everything that is sold in later futures contracts. Some of it is selling future production. This happens to be the case right now, as corn is in backwardation.
If you are curious about term structures of various commodities, check out this site:
http://www.hardassetsinvestor.com/w...-backwardation.html?showall=&start=1#wticrude
Currently, natural gas and brent crude are in backwardation, meaning that ETFs holding these commodities long are benefiting from rolling futures contracts (sell high and buy lower in the future).
Also, gold futures tend to have very flat term structures. It currently costs 1% per year to roll contracts from the 1st to 2nd month, which is more or less just the risk free rate.
sharbit, you're right. Much of what HNU has lost is due to compounding risk due to volatility. This is why both the bull and bear funds have negative performance over longer periods. For contango, it is zero sum, whatever the bull loses, the bear fund gains.
Nope. ETN providers aren't crazy. Most of the indexes they track build in contango (the index is based on rolling futures contracts). The only difference is that the ETN provider takes on the execution risk (tracking error, relative to the index). They still pass through any contango/backwardation through the index.
1 - 5 of 24 Posts
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