Best inverse x2 S&P500 ETF for hedge

Andiroo

Andiroo

Hi All

I have been using e-mini futures contract ES_F (S&P500) as a short hedge against my portfolio for a number of months. Whilst it has worked well since i only hold a few contracts max at any one time it is very lumpy when i buy or sell as i cant scale in or out.

I am therefore thinking about using an x2 inverse S&P500 etf in its place. I am obviously concerned about tracking errors as i could hold this for a number of months and would scale up or down based upon the long side of my holdings and my market sentiment.

Any suggestions on what to use. I have looked at SDS and a couple of others or should i just short a long etf?

Best

A.
 
The best instrument to use depends on what exactly you are trying to achieve with the hedge. if you can provide some additional info in terms the portfolio and how much of it you want to hedge then people may be able to provide you some with some ideas.

Have you considered using SPX or SPY options? You can also look into using VIX options/futures or VXX (an ETF on VIX futures).

I would definitely stay away from the double inverse ETFs as they are designed for day trading (i.e. they reset each day, so their performance can greatly diverge from the performance of the index over a longer period of time).
 
Hi

I am looking to hedge a trading portfolio of mainly long S&P500 equities of typically 8-12 stocks and an investment portfolio of similar number of stocks. Trading portfolio stock typically held for 1-4 months, investment portfolio probably closer to 6-24months.

Given recent volatility i have taken off most of my trailing stops and have been using a short S&P to hedge at least some of the risk -hedges probably cover somewhere in region of 25% to 33% of my long exposure. So in essence its a way of me not selling stocks i believe in but reducing my total long exposure. Does that make sense?

A.
 
Short SPY. It's the best next thing after the futures.

Inverse ETF's especially the leveeraged ones suffer from volatility decay, which is a bad thing for someone that holds for a long period as it is in your case i understand.

I have a portfolio that does the same thing. I have a value investing portfolio, but whenever the market according to my system is due for a fall I hedge while maintaining the stocks.

I think this is what you intend to do as well?
 
Hi

Yes you got it - that is exactly what i do. When you say the SPY i presume you literally mean the SPDR ETF and not just any S&P500 non-leveraged ETF?

Thanks

Andy
 
The ticker is SPY (http://www.google.com/finance?client=ob&q=AMEX:SPY)

Have you though about this: http://www.direxionfunds.com/funds/sp500_bear.html

Its going to price once a day but its a monthly mutual fund, not a daily ETF but its designed to do exactly what you want. A few catches are that you need to buy from the 1st to the 31st of the month to get accurate results and that it only prices once daily. In terms of tracking error, the compounding is per month versus per day on the ETFs so you would need to hold for 31 months to experience the same tracking error/compounding decay that you would get in 31 days in a levered -2x ETF. There are management fees but you may also be able to get this on a NTNRF platform.

I'm curious as to why you say the S&P minis are lumpy and hard to get in & out. If you are truly only trading a few contracts it should be no big deal at all. Mini S&Ps are one of the most liquid futures out there.
 
Quote from Andiroo:

Hi

Yes you got it - that is exactly what i do. When you say the SPY i presume you literally mean the SPDR ETF and not just any S&P500 non-leveraged ETF?

Thanks

Andy
More...

When I say SPY I mean the SPDR ETF yes... the normal S&P500 ETf and the most popular I think. That's the one I use to short and hedge the portfolio.

For example, I shorted SPY around 1150 a couple months ago because my overlay system said so. Although I'm 100% hedged the portfolio was still able to increase in value during these past 2 months due to the fact that my stocks sure they are down but not as much as the market is, which is nice.

If the SP500 keeps going up next week, most likely i will be forced to close the short SPY position. Sure if someone looks at it, I let an almost 150 point profit let go away and now is only 40 something points profit on the short position, but the intent of the short is not to make money or profits but to hedge the risk of a decline of the market...
 
Quote from WinstonTJ:

The ticker is SPY (http://www.google.com/finance?client=ob&q=AMEX:SPY)

Have you though about this: http://www.direxionfunds.com/funds/sp500_bear.html

Its going to price once a day but its a monthly mutual fund, not a daily ETF but its designed to do exactly what you want. A few catches are that you need to buy from the 1st to the 31st of the month to get accurate results and that it only prices once daily. In terms of tracking error, the compounding is per month versus per day on the ETFs so you would need to hold for 31 months to experience the same tracking error/compounding decay that you would get in 31 days in a levered -2x ETF. There are management fees but you may also be able to get this on a NTNRF platform.

I'm curious as to why you say the S&P minis are lumpy and hard to get in & out. If you are truly only trading a few contracts it should be no big deal at all. Mini S&Ps are one of the most liquid futures out there.
More...

Winston I first got the same impression as you... I didn't understand what he meant with SP futures being hard.

After reading more carefully he didn't mean he had problems with it, the problem as i understood for him is since the contracts have big nominal values (around 60k) he cannot scale in and out of the position as it were for SPY for example (for example short 20% at a time, or selling 20% at a time)

since the futures have a high nominal value he pretty much can only buy and sell "everytghing" at once.... hope i made my point clear since i'm not english native
 
Quote from salvador90:

Winston I first got the same impression as you... I didn't understand what he meant with SP futures being hard.

After reading more carefully he didn't mean he had problems with it, the problem as i understood for him is since the contracts have big nominal values (around 60k) he cannot scale in and out of the position as it were for SPY for example (for example short 20% at a time, or selling 20% at a time)

since the futures have a high nominal value he pretty much can only buy and sell "everytghing" at once.... hope i made my point clear since i'm not english native
More...

Yes understood.
 
Hi Winston / Salvador

The reason i use the term lumpy is nothing to do with liquidity - which is great but rather that you have to buy or sell in $50k +/- parcels. Sometimes i want to scale in and out at the $10k level rather than saying increasing a hedge from $50k to $100k all in one go.

Yes Salvador - you were spot on.

Thanks for the fund idea - i will look into this.

Andy
 
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