Analysts are attributing part of this week's decline to unwinding of etf/etn positions

[ajacobson]

Dynamic hedges of etf/etn products could cause them to overreact to price change

 

[Axon]

The selling off from huge leveraged ETFs like TQQQ, UPRO, TECL, etc. was surely greatly magnified by the mandated daily rebalancing. Some of the closing pump today as well since they all had to balance back in to 3x match today's uptick.

 

[Same Lazy Element]

The selling off from huge leveraged ETFs like TQQQ, UPRO, TECL, etc. was surely greatly magnified by the mandated daily rebalancing.

Very unlikely, these ETFs are linked to very liquid assets. The impact of the rebalancing would be roughly proportional to the square root of the order size to overall volume. Let’s take UPRO - if the daily change was 3% on SPX, the leveraged ETF would have to increase/decrease its exposure by 9%. Looks like a large number, but 9% of total NAV for all SPX leveraged ETFs is a fairly small amount compared to the combined volume in spooz, spys (and other SPX ETFs).

 

[Axon]

Very unlikely, these ETFs are linked to very liquid assets. The impact of the rebalancing would be roughly proportional to the square root of the order size to overall volume. Let’s take UPRO - if the daily change was 3% on SPX, the leveraged ETF would have to increase/decrease its exposure by 9%. Looks like a large number, but 9% of total NAV for all SPX leveraged ETFs is a fairly small amount compared to the combined volume in spooz, spys (and other SPX ETFs).

There are hundreds of 2x and 3x leveraged ETFs on US and non-US exchanges. The collective volume is huge.

 

[Sig]

There are hundreds of 2x and 3x leveraged ETFs on US and non-US exchanges. The collective volume is huge.

Is it though? What is their volume as a percentage of the volume on the instruments they track, and for something that tracks the S&P500 for example, the instruments they track are both the ETFs like SPY and all the underlying stock. The 2x and 3x volume is less than a rounding error to that.
You go to the obscure leveraged ETFs and their volume is in the thousands of shares a day with miniscule float.

 

[Axon]

Is it though?

Yes

 

[NewTraderAdventure]

Interesting

What I saw was an epic vol drop, you can see it in the uvxy . You guys saying this was caused by the rebal???? How so

Nothing comes as a surprise, in fact, theres a very interesting structural component to the ramp, that Im not at liberty to discuss, but how would you predict it in advance ?

I'm good, not that good.

 

[NewTraderAdventure]

Is it though? What is their volume as a percentage of the volume on the instruments they track, and for something that tracks the S&P500 for example, the instruments they track are both the ETFs like SPY and all the underlying stock. The 2x and 3x volume is less than a rounding error to that.
You go to the obscure leveraged ETFs and their volume is in the thousands of shares a day with miniscule float.

Maybe otc products you cant see ?

 

[Same Lazy Element]

There are hundreds of 2x and 3x leveraged ETFs on US and non-US exchanges. The collective volume is huge.

First of all, it's not huge compared to the underlying assets. More importantly, it’s irrelevant how many distinct products there are or what their trading volume is, it’s the cumulative NAV that matters in this case.

Here is a back of an envelope calculation for you. I specifically made it very conservative.

1. A cursory look at any ETF analysis tool (we use Capco, but ETFDB.com will have this data) will tell you that total NAV in leveraged ETFs linked to SP500 is under 8 billion.
2. Let's assume (since we are lazy) that average leverage is 3 (which is on the high side). That means that on a 3% day the rebalance is going to be 8bn * 3 * 3% i.e. about 700 million.
3. Volume in SPY alone on an average day is about 25 billion, but on a day when the SPX moves 3% it's probably closer to 100 billion. Anywhere from 15 to 20% of volume trades at the close, let's be conservative an assume 15%, making end of day volume about 15 billion. Let's assume that out of some 600-700 billion spooz that traded today, also about 15 billion traded around cash close.
4. Let's also assume that 3% is the prevailing volatility and that ETF managers are going to be trading it all in the span of last 10 min. Regular volatility for that period would be approximately 50bps then, but we would assume a volume-weighted volatility which would roughly be 1%
5. In a simplest market impact model, expected change in price is roughly equal to volatility * sqrt(trade/volume). So we have 1% * sqrt(0.7/30) which is approximately 15 bps

Anyway, my point is that impact of the stuff like leveraged ETPs or outstanding derivative position really depends on the relative volumes. While some leveraged products have/had NAV/positions that is comparable to the product they are linked to (which can cause all sorts of interesting things like in case of XIV), in case of the ones linked to SPX the impact is very small.

 

[Axon]

Here is a back of an envelope calculation for you.

The significant effects of rebalancing leveraged ETFs on market volatility has been studied ad nauseum and a cursory glance at the literature provides copious amounts of actual rigorous analysis that refutes your "calculation". Here's a sample. Last response, I'm done wasting my time in this thread.