Some of you have seen the news and messaged me, but for anybody who hasn’t yet, there was a major announcement made by ProShares concerning how they will be managing their volatility ETPs going forward. First let’s look at the announcement (green highlight is the important part) and then I’ll explain what it all means for us.
So you can see, they are reducing the exposure of the SVXY to 0.5x. In a nutshell this means that the product will move at roughly half the speed it did before, both up and down. It will go up half as much on good days, and go down half as much on bad days.
I think it’s very shady and irresponsible for ProShares to spring this change so suddenly and it does feel like an admission of guilt over what happened on February 5th and the aftermarket shenanigans of Volmageddon. My guess is some litigation is at the heart of this sudden change.
Having said that, in general I like the change. I’ve been in several Twitter conversations today and it certainly appears like I’m the only person out there who sees this as a good thing in the long-run. How are safer products and smoother markets a bad thing? I guess it just proves once again that very few investors are concerned with risk management which is a shame. A lot of volatility traders feel like their strategies were just turned upside down, blown up, ruined. If that’s how they feel then so be it. More opportunity for us right?
I’ve been trading these volatility ETPs for 7 years now and I can assure you that my edge doesn’t come from a narrow understanding of a specific strategy. It’s from a comprehensive understanding of the volatility and derivatives market in general. So I honestly don’t care when and how these volatility products change over time. I will always be able to make little adjustments here and there to accommodate any changes the issuing banks feel like they need to make. We are all at the whim of these financial institutions. We take the products available to us and make the absolute most out of them.
We’re in this for the long-run. New products will emerge, old products will die, changes are inevitable. All that matters is that we remain forward looking and laser focused on maximizing our total portfolio return.
So how will this affect us and our volatility strategies?
1) The VTS Conservative Vol Strategy won’t see any changes. I love this strategy. As you know I focus very much on risk management and risk adjusted performance. I believe the ZIV offers one of the best risk reward profiles of any financial product on the market. Let’s hope the blowup of XIV and the changes to SVXY finally give this fantastic product ZIV a boost in daily trading volume.
2) The VTS Tactical Volatility Strategy and the VTS Aggressive Vol strategies will need to be adjusted. I don’t do anything rushed or for show, so please give me a little bit of time to work through what the best course of action will be. There’s several things to consider:
– Perhaps make one of them a simple Short VXX / Long VXX strategy. That way long-term performance won’t change much at all. The downside being that it would cause issues for that strategy with respect to tax sheltered accounts.
– Perhaps just keep one of them as is and use the new 0.5x SVXY. Like I said there is nothing wrong with safer products. Even at 0.5x it will still be moving a lot more than the S&P 500 so plenty of opportunity for harvesting the risk premium.
– One of the other products I spoke about in this video VMIN is also something I’m watching closely. It’s undergone some changes as well which should make it a better product. We’ll see if the trade volume is adequate, but I do like VMIN.
– Merge the two into one strategy that is positioned more aggressively than the Conservative and just give people two simple options on different ends of the risk spectrum.
I’m considering all options and I will come up with the best route forward. We have zero control over financial institutions or laws and regulations, we just do the best we can with what we’re given. I will find that optimized path forward.
In the mean time if you’re confused, perhaps consider just taking the VTS Conservative Vol Strategy positions for a little bit and reassess when we have complete answers to all of this. (Or just permanently use this strategy because it’s awesome!)
I am sorry this month of February has been so hectic for you trying to keep up with all the changes. More clarity is coming I assure you. The truth is I’ve been anticipating this for a number of years so I can easily just roll with the punches. This is what banks do. They dangle carrots in front of traders, and when things go badly they pull the rug out and protect their own butts. Well the joke is on them because we made great returns for years, didn’t lose a penny in the crash, and are now ready for more. Bring it on!
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VTS Conservative Vol Strategy – Optional replacement for lower risk tolerance investors
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