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The ETF Gloves Are Off
Bearish bets made impossible, compliments of UBS. Either that, or UBS' recently upgraded (with i7 chips of course) computers just cant handle the basis calculations. Either way, is something very fried with ETFs going on behind the scenes?
IMPORTANT NOTICE: Inverse, Leveraged and Inverse-Leveraged Exchange Traded Funds are no longer available for new or additional purchases at UBS
Effective July 27, 2009, UBS is suspending the offering of Inverse, Leveraged and Inverse-Leveraged Exchange Traded Funds (ETFs). You will no longer be able to make new or additional purchases and will only be able to liquidate current positions through UBS at this time. Any attempt to execute a trade of such ETFs will be rejected.
Please contact your Financial Advisor with questions.
Hopefully iShares and Direxion have some good class action defense lawyers.
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Ed Jones pulled this last week, with some pretty choice things to say about the funds.
Yeah, I think something is up. I think the SEC/FINRA is investigating these funds, and you'll start seeing a whole lot of CYAs - after the horse is well down I-70.
Collective fear of the retail investor sector cracking the confidence game is gaining momentum. Perhaps this action by UBS forms a part of their carrot in prep for the upcoming high level meetings over Swiss banking. As a side note, (vs a side letter or CDS as they are known these days) I wonder what is and will be happening in the Swiss reinsurance arena this week.
Very good reporting ZH! Keep up the good work!
The leveraged ETFs / short ETFs have a horrible track-record, the returns did not match what investors should expect given movements in the underliers. I am not surprised at all about this, I suspect there will be lots of law-suits.
If you want to short the market, there are many more efficient ways to do so... futures or options or direct shorts, and to get leverage you need a margin account. The math behind leveraged ETFs just does not work the way people expect it to.
My favorite example when demonstrating the investor un-friendly aspect of these guys are FAS and FAZ. Despite their completely opposite positioning in the market, they both over time have been regressing toward zero. Heads or tails you lose...I've heard that so much lately, ugh.
WTF?!
I trade these exclusivey.
I know they are supposed to be TRADING VEHICLES, and are not designed for long term buy and holds.
Something else is going on here.
When they reverse-split, I bought long term puts on both these suckers... let's hope my bet pays off...
Why would there be lawsuits? If you actually read the investor literature provided describing all these ETF's they practically beat you over the head trying to explain these are terrible things to hold onto for very long.
without a doubt, its knocked around by too many smarter players. stay away.
unlikely a conspiracy theory, more likely their retail clients are loosing their shirts dicking around with them
Well, if ZH is correct - and it sure is - about the state of the economy, it is a certainty that the market will go down at some point.
I guess they want to avoid losing money, so they just don't offer the possibility to bet on a event that will certainly occur.
Mind blowing how many retail investors are still buying ultrashort funds for buy-and-hold portfolios. This story has been covered everywhere, so it's hard to have any sympathy for people losing money in them at this point. At least UBS following Ed Jones following Schwab will help protect some clueless investors from themselves.
While ultrashort funds are certainly not to buy and hold, there seems to be a problem with direxion's disclaimer. For example, for FAS/FAZ it states "this investment seeks to REPLICATE... the RIFIN." To replicate means to reproduce, but all to often it appears that these funds dictate the RIFIN, meaning the RIFIN replicates FAS/FAZ. If you put up the intra-charts of all of them, you will see a lot of times FAS/FAZ get blown up, then the RIFIN follows.
More evidence on how mathematically illiterate most folks are.
why would iShares need class action lawyers- they don't make a leveraged product? Do you mean ProFunds?
No surprise about 1X short funds being frozen, as short shares are becoming increasingly hard to find.
Direxion products are crap. These need to be put out to pasture.
They are not 3x dollar value, they are correlated -3x to time. The only thing to do is short them, and no retail broker will let you short them.
Basically the retail side was allowed to buy them and the big money was allowed to sell them. This was a conduit from the little to the big.
I guess IB isn't a retail broker then, because they let me short them... : p
I always crack up laughing when some analyst talks about shorting long-only commodity-linked ETFs. Think about it... you're borrowing shares to go short a fund (generally structured as 4.5 excluded CPOs) in which the underlying positions are always long. It's no wonder the net hedging response has in last few years been biased to the long hedgers. Then you got series 7 brokers without series 3s and RIAs not registered as CTAs advising as to "investing" in commodities. Anyone heard of NFA Bylaw 1101? Surprised no class action started after commodities imploded in 2008. Talk about ex post validation of impact of long-only commodity index funds on price discovery... For more on legal background on how commodities got securitized into ETFs, see: http://www.wcl.american.edu/blb/01/3ritter.pdf
I don't see the difference.
by shorting a futures-holding ETF you are supplying ETF shares which meets the demand by a long investor. if you wouldn't it would have been met by the ETF issuer issueing more shares -> increase his long commodity position.
thus, instead of create a short futures position you are indirectly decreasing a long futures position.
I don't see the difference.
This has been going on a hell of a lot longer than the ETFs have been around. How many Commodity Pools are sold by series 7 folks as "Managed Futures"?
Admittedly, the popular ones tend to be automated trading programs so its hard to say that clients are really "investing" in commodities.
I just got through talking to a UBS broker about this. The guy does both retail and institutional business, and said that the institutional side doesn't care, but retail clients are pretty pissed.
No surprise there... but the issue is the timing and the blanket prohibition of trading such instruments. Most retail investors have already lost a lot of money in trading these inverse instruments, so UBS coming in to "save the day" is quite late in this market rally.
A contingent of retail investor has no right to be pissed, though, and it's those crazy dudes that buy these leveraged instruments on margin. In such cases, if UBS is loaning money out on these leveraged instruments, one would think they would have every right to restrict client purchases.
But those who are most ticked off, as the broker mentioned, are the ones maintaining cash accounts-- not margin accounts. It might end up being good PR in the long run for UBS, but I do know that they have seen a surge in accounts closing... and that just this morning.
With other retail brokers testing the waters, UBS seems to believe they can handle what exodus there will be. But I don't think they expected the backlash they did. Well, at least this broker didn't expect it.
Tyler: 2 views I have had concerning these ETF's is they have been stealing all the volume from the stocks themselves, and people have been effectively hedging with ETF's instead of the VIX. If this is the case....would we expect to see a plunge in over all volume, and a general spike up in the VIX?
Funny how shares are getting so hard to borrow, with the economy rebounding so well & all ... why wouldn't basically everybody holding shares want to lend them to the "shorting suckers"? The shareholders of UBS and these other *altruistic* organizations that claim to be trying to protect the silly retail investors should be in revolt, I think. After all, aren't they leaving revenue on the table by not lending the shares?
I believe the people commenting here on the effecacy of the leveraged & inverse products are missing the forest for the trees ... the unwillingness to lend shares or trade in any short-oriented products or activities is the story, IMO. There is obviously a concerted effort to stop the inevitable from happening (or at least to not help fuel the fire beyond the inevitable).
So one question to the group here ... do these actions make shares of inverse or leveraged inverse shares more or less valuable?
Sorry...forgot to log on:
Tyler: 2 views I have had concerning these ETF's is they have been stealing all the volume from the stocks themselves, and people have been effectively hedging with ETF's instead of the VIX. If this is the case....would we expect to see a plunge in over all volume, and a general spike up in the VIX?
VIX +6.5%, SPX unch - at the moment.
VXX +1%
cash VIX is expected to rise on Monday (volatility is lower when the U.S. market is closed than when it is open, therefore the VIX is higher on Mondays and lower on Fridays, on average). vix futures (a more accurate measure of what is actually happening to volatility expectations) didn't move nearly as much today.
- CB / Aristides Capital
cash VIX is expected to rise on Monday (volatility is lower when the U.S. market is closed than when it is open, therefore the VIX is higher on Mondays and lower on Fridays, on average). vix futures (a more accurate measure of what is actually happening to volatility expectations) didn't move nearly as much today.
- CB / Aristides Capital
Folks, I have traded a LOT of FAS/FAZ and they have made me a lot of money and lost about as much as well! ETFs are nice but it looks like to me like they don't want folks trading on ANYTHING that involves shorting the market. Folks having issues shorting stocks and such then out of the blue folks want to ban inverse etf's... Something does not smell right.
-Silence
Ihave heard so many stories of Mutual funds and pension companies calling in their stock, to make them unborrowable...unshortable. I read numerous stories on blog sites about their shorts being FORCED IN, at losses. Something is going on, and I think it is the powers that be creating their own "DO NOT SHORT RULE".
I agree completely. In my tinfoil-covered head, I think the bankers are setting the stage for something bigger. They probably won't be able to get away with another 'shorting ban' on financials in the current market, so they're taking away other methods.
Sic the SEC and associates on 'investigations' into ETFs that can leverage short financials and real estate, and nudge the brokerage firms to take away those as options for long-only investors (for fear of 'lawsuits'). Now the retail crowd can no long buy/daytrade these, and the appeal goes away. Next step is the new rule inforcing uptick and various other criteria. I think we've already seen the sudden 'hard to borrow' status of stocks, not to mention the rolling buy-ins.
Once all this is in place so that brokerage accounts have no means to bet against financials / real estate other than buying puts, the banks are free to let the stuff hit the fan.
Personally, I'm grabbing puts. And tinfoil.
I don't disagree at all on your premise that something doesn't small right, but...
UBS is taking the position of restriciting BOTH inverse and levered funds. So if you as a retail investor wanted to buy into a 3X long fund- it seems you are out of luck. It's the 1x short funds I wonder about... why would UBS allow you to buy the SPX long, but not allow an investor to short the SPX at 1X? Beats me...
The reality is that there has been a ton of margin calls on the levered inverse ETFs. From a business stadnpoint, I can understand how UBS wants to curb that activity. But I'm left wondering why UBS didn't place such curbs/restrictions on retail accounts when levered long-only funds were tanking in October 2008? Where was UBS then?
Again, say what you will about the pitfalls of investing in this ETF junk. It's the timing of these announcements that is most puzzling...
I had missed this earlier in the month, but it 'fits in the plan.' I wonder if any ambitious state AGs might jump on this? Nah...
UPDATE 2-Massachusetts begins probe of leveraged ETFs
http://www.reuters.com/article/bondsNews/idUSN1532403920090715?sp=true
State AG's may try to pursue this to gain a few populist brownie points, but it's a tricky game for them right now. The open question is who the real villan here? The manager who created and issued the ETF product? Or the broker who may have used any number of methods to sell a product that didn't live up to its hype? My sense is that some state AGs may be barking up the wrong tree here.
One "reality" is that the prospectuses from the ETF issuers have pretty much gone out of their way to play CYA and describe the risks of these levered instruments in detail. A state AG will have a pretty tough time against an ETF issuer that has dotted the i's and crossed the t's in a prospectus-- especially if the ETF entity has a good group of lawyers. Other the other hand, who knows what the heck individual brokers are saying as they're marketing these products...
Again, UBS and other brokers are likely playing some CYA in the "here and now"... but they didn't play CYA when the market was tanking and 2X and 3X levered long funds were stinking to high heaven. Why?
My sense that Direxions', Rydexs' and ProShares' of the world are just as culpable as the brokers that didn't caution retail brokers on the pitfalls of trading these things. But the former is more 'protected' than the latter.
I still think the timing of these trading restrictions, though, is highly dubious.
I think you answered your own question. The institutions aren't banning risky things to protect their clients - they're banning only certain things in order to achieve a broader desired market outcome (and again - at the expense of their own shareholders).
The timing shouldn't be surprising, and the intent should be self-evident.
My question is, when the stuff starts hitting the fan, then where will all the funds that might have previously flowed into shorts/inverses/etc. now go? To prop up commodities even as demand isn't there? To Treasuries?
Yeah, I probably did answer my own question... although UBS has probably made itself some good money on underlying forward transactions with these same ETFs.
Where would investors go? Good question. Many investors who insist on purchsing these things will move to other brokers who will make a trade. If these ETFs are restricted from U.S. exchanges, there are foreign exchanges that will be more than happy to fill in the void. I think the same type of investor who has bought the inverse ETFs are the same ones who would avoid Treasuries like the plague. They would likely buy gold or silver first.
Yeah - I guess I'm an unusual case. I'm all cash in us treasuries (because if anything I'm in the deflationist camp, due to the tidal wave of debt deflation) ... but I've been playing with inverse leverged ETFs (sds, qid, leveraged oil) for 2 years on the side with some "fun funds". I almost tripled my money between 2007 and this past April, but now I'm back down to being only about 25% up due to this big short squeeze. They can't squeeze me out, though - unless they liquidate my holdings without my consent. I plan on making a little more money, and then getting out while the getting's good (I'll guess early this November). :-)
Looks like a duel of financial markets. Who is able to destroy the other's market first?
"All aboard the bubble express!"
Invest in China! Invest in China!....the talking heads bloviate.
China or US? US or China?
A battle fought through the financial markets. Same devastation, but a much cleaner model.
Who wins? Who loses?
Who cares? Everybody and nobody.
Maybe this is just the opening act for the quadrillion dollar derivatives market meltdown.
Dunno. Those ETFs have very good disclosure - I think it will be very hard to sue. Moreover, I have read interviews with Rydex and ProShares management who explicitly mention such risks.
"Two more firms that feel their clients are unable to make educated decisions for themselves and need to be coddled. On Wednesday of this week we wrote about Edward Jones dropping the sale of leveraged ETFs, now you can add LPL Financial, and Ameriprise to the list of firms who will not allow you access to these investment tools."
http://etfdailynews.com/blog/?p=4893
Hmmm. If we extend that logic what conclusion do we reach?
I am not so tin-foil hated as some other here, but I suspect there is more than meets the eye to this story.
+++
On an unrelated note, is it possible to get the entire blog on a single page, i.e., like the blogspot page?
-Bobby02
ZERO chance of a lawsuit. Those leveraged fund contracts are gun tight. The risks are in BOLD letters.
Not against the ETF companies, no. Against the brokers / brokerage firms that facilitated the trade with retail clients. You know, the retired grandmothers who were completely unaware of the risk / rebalancing decay when they bought it through their broker.
The firms/banks will go to extremes to avoid the press generated if they don't 'comply' i.e. shut the doors to those funds immediately.
IB isn't one of the traditional brokerage firms, so I wouldn't lump them in.
You are assuming that you will have a functioning state or federal court system. Maybe that assumption won't hold. The tax shortfall will hit the courts too. Trials will have to be postponed and court's dockets are already full for several years.
http://www.nhpr.org/node/19820
Can't read that link yet, but in my lovely home state - obviously with a massive record deficit - the courts were hit hard in funding. Mostly ADA and court staffs, but (and I am not making this up) that was nicely offset by a quadrupling in spending on civil legal services to indigent persons.
check out the 10-Ks
Last time I did I discovered that the portfolio holdings for one of the double inverse funds was a swap agreement with UBS. This was the portfolio.
So is it too "tin foil hat" to wonder if UBS, if they see a big sell-off ahead, are trying to force their own clients out of their positions at losses, which are profits for them, before those become losses for UBS?
Definitely too tinny. UBS is not forcing anybody to close any position, at a loss or otherwise. They just won't let you open new positions.
But that's a nice conspiracy theory. Save it, as it may come in handy at a later date.
UBS is forcing all their customers to sell their leveraged & inverse ETF holdings by August 3rd. I'm guessing most brokerages will follow suit (Edward Jones and a few other smaller companies already stopped selling them earlier).
Check out www.etfdailynews.com for more details also.
The banksters will do anything, ANYTHING, to prop this market up.
what is their purpose for doing so? do program trades make more money in bull rallies? are they going to run everything up for a sell-a-thon later? or is this just for net asset portfolio help to make them seem more solvent?!?!
http://finance.yahoo.com/news/SEC-rule-on-naked-apf-3523034809.html?x=0&...
ban on naked short selling now permanent
It is unclear to me as to when the UBS clients will have to liquidate. There is no timeframe on the announcement, just a remark that they will only be allowed to liquidate. There must be some hard date for all positions to be closed and maybe, just maybe, the brokers have been working the lines this morning, drumming up commissions via selling of these positions held by UBS clients. So, is this the short squeeze de jour?
Aug 3rd is D-day.
Oooh... sweet. If that is true, I might sell now & buy back then!
I'm not sure people are thinking through the potential consequences here ... but anywho...
I guess I'm inclined to believe that this is basically a big emotional play just like the naked shorting thing (which was already illegal, no?)... and agree there's really no way to stop people from buying & selling inverse proshares or direxon in other free(r) markets .... unless they are made outright illegal. Would the gov't go that far?
UBS IS forcing clients out losses or not. I just got off the phone with a UBS advisor who states that ALL clients must be out of these funds by August 3rd. Advisors are not allowed to sell their positions until Aug 4th.
Doesn't matter if you have a loss or a gain...you are being forced to sell.
Perhaps he was referring to a margin account, i.e. one where you purchased shares with the broker's money.
If this is a cash-equity position, I do not see how anyone can force you to sell an asset to which you have free and clear title.
Furthermore, even if UBS's (illegal) order were to stand, you could simply transfer shares to another broker (most have not yet taken any such action). There would be no net effect.
I think the conspiracy theories are getting out of hand. Some more facts would be nice.
My UBS accounts are not on margin and I can confirm that my UBS broker informed me this morning that I have to liquidate my inverse ETF holdings in a couple of days (I guess August 3rd is the specific drop-dead date).
Wow, this is unbelievably corrupt - the previous comment that the instruments backing the inverse ETF's are just swaps with banks like UBS is EXTREMELY TELLING!!!!!! I wonder if they were tipped off to the rumored bank holiday in August/September - that kind of panic would probably crash markets and make those swaps huge losers (currently showing significant gains).
So these bankers, the same ones that have received billions if not trillions in TARP and other guarantees have used the money to prop up the stock market (not loaning out which is why velocity has dropped) and commodity market with approval/direction from the administration. Now would be a good time to ask what all of the hundreds of trillions in derivatives are all about??? Are they swaps just like the GS/AIG conduit??? Might many of these banks swaps only profit if the market goes up, so they are forcing people out that are short because the drop is inevitable and they would be wiped out on their swaps???
Apparently the rule is that they can only sell you something that is guaranteed to lose money and will go directly into their pocket. All the exits are barred, I am not sure there is a safe haven for your assets except perhaps precious metals. People, we are losing our shirts trying to make money in a rigged game with participants that all take their cut. Perhaps wealth preservation is the only option in a Tails I win, Heads you lose market.
Now, if the administration knows of a dollar crisis coming we could have a zimbabwe type event and prices would constantly go up even on stocks, but it would be worth much less. If this is the inevitable result, shorting provides no benefit and I would then thank the stars that they are trying to save investors that are just using their melons. If we really have a strong dollar policy as Geitner says (try not to laugh with the Chinese students), then shorting mechanisms should be available (especially 1X shorts).
It would be nice to know the motivation and where the pressure came from to make this change.
hah not even enough time to ACAT out
good riddance. i have believed for a long time that this low volume rally has been fed by the easy availability leveraged short etf's. as investors attempt to get short or hedged with these instruments and then "prematurely evacuate" due to the high volatility and disadvantages of holding, they push the market up as they sell, providing bulls with what looks like strong bid in the market. this in turn forces the strong shorts to cover as well. if every firm were to ban these i believe we will see an end to the last minute saves that have plagued this market. ironically, once they are no longer readily available, they will be the best investment to own.
McLuvin wrote > "...ironically, once they are no longer readily available, they will be the best investment to own."
That's what I'm anticipating, or betting on...
As I recall, ProShares used/uses UBS swaps.
I do not care how much they prop the market. I buy SDS everytime it drops 1 dollar. I started at 53 and have and will continue to buy.
I bought an inverse ETF the other day expecting a "normal" corrective cycle at the very least. Not a bearish or bullish commentary but taking advantage of a very overbought 5:3:3 Slow Stoch reading for the last 2 weeks. I'm not a UBS customer, but will Fidelity just be told to liquidate my position on August 4th and saddle me with a loss.
I was expecting a quick pullback which looks like it will never happen in the new paradigm of Only Up will be Tolerated.
http://www.youtube.com/watch?v=weNrDRxTbY0
Guys, FINRA issued guidance on these ETFs http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/noti...
This line says it all "inverse and leveraged ETFs typically are not suitable for retail
investors who plan to hold themformore than one trading session"
FINRA put every B/D on notice. If your brokers sell retail clients these ETFs with the expectation to hedge for more than session, you're recommending unsuitable trades. Done and done. The compliance lawyers always win.
Expect others to follow suit.
There is something fishy even intraday about these funds. For example take today in the QQQQ Powershares
QQQQ (PowerShares) +.77%
QLD (Ultra double Powershares) +.16%
QID (Ultra inverse Powershares) - .15%
so the QLD significantly underperformed the QQQQ instead of being the double. One would expect a +1.54% return today but only got .16%
They don't always perform like that and many days they are double but lately I have been seeing unusual action like this. For most of the day the QQQQ was positive yet the QLD was negative. That money is going into someones pockets and as you can see not into the shorts.
Still, there is more to this and I am confident it is not about protecting the retail investor.
nevermind - deleted