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ETFs , and what ... " Pure Beta " and ETN means ....
- Thread starter md2324
- Start date
not sure about pure beta sounds like a marketing term, but etn's have a different structure than etf's and are debt instruments. You have to be careful with anything labeled etn:
http://wiserinvestor.com/etfs-vs-etns-you-better-be-careful/
ETNs are debt instruments. Debt instruments do not own anything but a promise to track an index. The largest ETN based on assets is Barclay’s iPath Dow Jones Commodity Index (DJP). From iPath’s website, we see DJP’s largest holdings are 30% energy, 21% grains, 19% industrial metals, 12% precious metals, 2% livestock and 16% other. At first glance, it would appear that you own commodities with this allocation. However, this allocation is used only as a measure for performance. An investor does not own any commodities, only a promise from Barclays to pay an investor the theoretical allocation of the commodity index. If an ETN provider should go bankrupt, the investor will not receive his or her investment back. Why? Because an ETN is considered an unsecured debt instrument.
An example of this is the recent Lehman Brothers failed ETNs. The three ETNs were Opta Lehman Commodity, Agriculture and Private Equity. In September 2008, these ETNs halted trading when Lehman Brothers failed. Currently, the final results are being sorted out, but it appears that Lehman ETN holders will receive 2 cents on the dollar from their original investment. Shortly after Lehman’s collapse, Bear Stearn’s ETN holders were hours from the same fate, when JP Morgan stepped in an purchased the company.
http://www.etftrends.com/2009/06/7-differences-between-etfs-etns/
http://wiserinvestor.com/etfs-vs-etns-you-better-be-careful/
ETNs are debt instruments. Debt instruments do not own anything but a promise to track an index. The largest ETN based on assets is Barclay’s iPath Dow Jones Commodity Index (DJP). From iPath’s website, we see DJP’s largest holdings are 30% energy, 21% grains, 19% industrial metals, 12% precious metals, 2% livestock and 16% other. At first glance, it would appear that you own commodities with this allocation. However, this allocation is used only as a measure for performance. An investor does not own any commodities, only a promise from Barclays to pay an investor the theoretical allocation of the commodity index. If an ETN provider should go bankrupt, the investor will not receive his or her investment back. Why? Because an ETN is considered an unsecured debt instrument.
An example of this is the recent Lehman Brothers failed ETNs. The three ETNs were Opta Lehman Commodity, Agriculture and Private Equity. In September 2008, these ETNs halted trading when Lehman Brothers failed. Currently, the final results are being sorted out, but it appears that Lehman ETN holders will receive 2 cents on the dollar from their original investment. Shortly after Lehman’s collapse, Bear Stearn’s ETN holders were hours from the same fate, when JP Morgan stepped in an purchased the company.
http://www.etftrends.com/2009/06/7-differences-between-etfs-etns/
It is a marketing term, in particular I think it's Barclays'. Pure Beta is just a way to get exposure to markets that may be more difficult to access normally.
For example, a retail investor may want exposure to corn but they don't have a futures account or may not know how to or want to roll monthly contacts over...so they pay Barclays 75bps pa and buy an ETN whose value follows a strategy comprised of rolling monthly corn futures contracts.
...I think some of these have more elaborate roll strategies and take the term structure into account...but the idea is the same.
For example, a retail investor may want exposure to corn but they don't have a futures account or may not know how to or want to roll monthly contacts over...so they pay Barclays 75bps pa and buy an ETN whose value follows a strategy comprised of rolling monthly corn futures contracts.
...I think some of these have more elaborate roll strategies and take the term structure into account...but the idea is the same.
Thank you both for your replies . Makes sense now. The Pure Beta ETFs I like , it's just that when looking at these as an Options play ..... There is virtually NO Volume and or O.I. on any of their contracts ..... as well as wide spreads on the BidxAsk . So this would mean to Avoid trading these type of Pure Beta ETFs. ..... Options wise ? Just trade them as an Outright " Futures " equivalent stock play ?
Thank you both for your replies . Makes sense now. The Pure Beta ETFs I like , it's just that when looking at these as an Options play ..... There is virtually NO Volume and or O.I. on any of their contracts ..... as well as wide spreads on the BidxAsk . So this would mean to Avoid trading these type of Pure Beta ETFs. ..... Options wise ? Just trade them as an Outright " Futures " equivalent stock play ?
yes you should only trade the most liquid etfs with the smallest spread. You could drive a semi thru a lot of the less liquid option spreads. The other thing is that you are generally losing on the roll yield. This is why many etfs don't track the underlying correctly. You may want to read up on the ACD thread, its absurdly long but there have been some deep end of the pool discussions of these issues plus pair trading. If you want quick liquid beta you can trade the QQQ's very deep liquidity in options and the underlying.
https://en.wikipedia.org/wiki/Roll_yield