TU#164 - deleveraging me

TRADING UPDATE

The hunt is on.  I’ve decided to really, if not entirely, scale back the use of double-long and double-short ETFs.  Although they are volatile in the short term, when I did an analysis of their profitability, a few were net profitable but most lost money.  The problem is in the mathematics of the re-balancing.  There is a natural erosion in value, and the more choppy the market the greater the erosion.  Since REAP doesn’t trade out the full position, the core remainder, if held for a long time, is up against a significant head-wind. 

I stayed up last night for quite a while looking at ways to replace these ETFs, whose purpose was to generate high short-term volatility to accelerate the REAP process.  In general I want to retain maximum volatility, eliminate single-stock risk, reduce correlation as much as possible, and pick up dividends where I can.   So I looked in the area of unleveraged commodity and commodity shares ETFs, emerging market ETFs – particularly small caps, technology, and unleveraged short ETFs (to retain some opposite correlation).

So you’ll be seeing a number of changes to the portfolio in the next few days and weeks.  Thus began the de-leveraging of me …

I replaced the new Pro-Shares Gold Bullion double-long ETF with the Market Vectors Gold Miners ETF – basically a portfolio of big-cap gold stocks.  The level of volatility looked similar between the two on the charts, so they should behave the same way – the gold shares perhaps having the edge because they tend to overshoot and undershoot bullion itself.  If and when a smaller-cap gold stocks ETF comes out, I’ll probably switch to that for added volatility.

The equity ground down a bit more today on the weakness of agriculture and energy – in fact all my larger holdings were taking hits.  But, still holding up fairly well at only 1.4% down on the year.  Been losing some ground on the S&P500 though; REAP now only ahead by 3.2%.  No wonder my hit count is dwindling.  The market this month has been like watching paint dry.

Cheers,
Allocator
a.k.a. George Parkanyi