Author: Matt Thalman

Single Stock ETFs Are Here

Posted on by Matt Thalman

In July, AXS Investments debuted US-based investors' first single stock Exchange Traded Funds. These ETFs allow investors to gain leverage on certain individual stocks.

However, because you are using leverage, there is more risk involved, and the authorities want investors to understand these risks before purchasing these new products.

The risks are associated with the leveraged exposure these new ETFs offer and the risk associated with investing in individual stocks. But since leverage is being applied, the risk level multiplies.

For example, one of the new ETFs being offered is the AXS 2X NKE Bull Daily ETF (NKEL) which provides investors 2X leverage to Nike (NKE) stock. This would mean that if you owned NKEL on a day when Nike stock increased by 0.50%, the NKEL ETF, which is 2X leverage, will go up 1.00%.

But, the opposite is also true. So if Nike stock fell by 1%, the NKEL ETF, which tracks Nike stock at a 2X leveraged ratio, would lose 2%.

Leverage is a very nice thing to have when it is being applied in the direction you want it to move. But leverage can be deadly when it is going against you.

Hence why the Securities and Exchange Commission is warning investors of the dangers associated with any single stock ETF, even if it is not marketing itself as leveraged.

One example of a new single stock ETF that is not marketing itself as leveraged is the AXS TSLA Bear Daily ETF (TSLQ). This ETF only tracks Tesla, but to the downside with just 1X leveraged exposure.

This essentially means that the TSLQ is shorting Tesla. But, unlike having to short a stock, which would require approval from your broker, a margin account, and the risk of not losing more than 100% of your investment, you simply have to buy this one ETF and not worry about the other things. Continue reading "Single Stock ETFs Are Here" →

ETFs For A Negative Market Turn

Posted on by Matt Thalman

Do you believe the current market rally is here to stay?

That belief would mean that despite two consecutive quarters of negative Gross Domestic Profit numbers and the Federal Reserve continuing to increase interest rates as a method to bring down inflation, which is at a level that we have not seen since the 1980s, we actually are not currently staring down the barrel of a recession.

There are economists and market participants currently on both sides of the argument of whether or not we are heading towards a recession.

I am not personally confident enough to invest based on where I think we are heading in the short term. But I still like to know what is available for me to buy if the tide seems to be turning one way or the other.

As I mentioned, I would like to give you a few ETFs that would make you money if the market turns negative. These ETFs are all inverse or leveraged funds, meaning they will experience contango if held for longer than one day. Lastly, I would also like to point out that these ETFs, if used correctly, could help investors hedge their portfolio’s against a market correction.

The first few I would like to mention are the basic inverse ETFs that track major indexes. The Direxion Daily S&P 500 Bear 1X Shares ETF (SPDN) tracks the S&P 500 and will increase in value daily if the S&P 500 goes lower.

For example, if the S&P 500 falls 1%, SPDN will increase by 1%. However, if the S&P 500 increases by 1%, SPDN will decrease by 1%. SPDN and every other ETF I mention today will only produce a near-exact correlation to its corresponding index on a one-day basis. Continue reading "ETFs For A Negative Market Turn" →

SPY Set To Lose Its Crown

Posted on by Matt Thalman

Since 2017, the King of the Exchange Traded Fund world has slowly been losing ground to its closest competitors.

The SPDR S&P 500 ETF Trust (SPY), the undisputed ETF King since ETFs became popular, is set to lose its crown within the next few years. Well, perhaps it would be better to say that it will lose one of its crowns or maybe one of its world titles while still holding a few others. Let me explain...

The SPY ETF is and has been, with the exception of just a handful of months over the last 20-plus years, the largest Exchange Traded Fund in terms of assets under management. Currently, SPY has $365 billion under management.

In contrast, the next closest competitor, iShares Core S&P 500 ETF (IVV), has $298 billion, and then there is the Vanguard S&P 500 ETF (VOO) at $264 billion in assets.

The SPDR ETF has more than $65 billion in assets compared to the second largest ETF and more than $100 billion compared to the third largest ETF. So why are there predictions that its competitors will overtake it in the coming years?

First and foremost, since 2017, it has been losing ground to IVV and VOO, and based on results from the first half of 2022, the trend doesn't appear to be changing. VOO has added $29.2 billion in assets year-to-date, while IVV has added $15.7 billion. On the other hand, SPY has lost $22.7 billion. Continue reading "SPY Set To Lose Its Crown" →

New Overnight Exposure ETFs

Posted on by Matt Thalman

It's no secret that big moves happen during "extended" trading hours. These extended hours are those that come before and after the markets' standard hours.

During these hours, 4:00am until the market opens at 9:30am Eastern and after then again when regular trading ends at 4:00pm until 8:00pm Eastern, company earnings are reported, merger and acquisition news is posted, and a slew of other big newsworthy events trickle out to investors. Newer retail traders may not know about these ‘extended’ trading hours, but those who follow the markets closely understand the importance of this time.

These extra hours of trading are so important because, during the morning session, it more or less sets the tone for the overall trading day.

In the pre-market hours, we received a few earnings reports that make stocks move in one direction or another. But more importantly during the morning session, investors receive a lot of the economic data that will dictate what is occurring in the economy and thus cause the market to move one way or the other.

During the after-hours trading period, from 4:00pm until 8:00pm Eastern, investors are hit with more company-specific news, such as the bulk of earnings reports, conference calls, company-specific ‘material’ or special information, and mergers and acquisitions.

These more company-specific news events cause individual stocks to make massive moves either higher or lower, but typically won't effect the overall markets the same as the economic data and reports that are released pre-market.

And then, of course, we also have the none stock market or economic data news, such as bombings, terrorist attacks, weather events, etc. These news stories are unpredictable but can push and pull the prices of individual stocks or the broader market. Even those that occur during non-regular trading hours, and perhaps don’t directly relate to businesses that trade on the market could still have an overall effect on the price of stocks (both positively or negatively).

How can we take advantage of these pre and postmarket moves?. The fund managers of two new exchange-traded funds (ETFs), the NightShares 500 ETF (NSPY) and the NightShares 2000 ETF (NIWM) believe they have a strategy to leverage these times of volatility. The back-tested theory behind these ETFs has found that by owning stocks during the non-regular trading period and then selling them during regular trading times, you would have performed better than the overall market.

Just this year, for example, the S&P 500 is down 18%, but during the non-regular trading hours, it's only down 10%. The Russell 2000 has a similar story, down 21% during regular trading hours and only 7% if you where just invested overnight according to AlphaTrAI.

The NSPY is a fund that will track the S&P 500 while the NIWM will track the Russell 2000. Both funds are intended to be held for just one day at a time, since they will be using futures, options, and derivatives to gain exposure to the markets. Furthermore, each fund will offer investors 1X exposure to their corresponding index during regular trading hours and 1.5X exposure during the overnight period. These exposure percentages are before fees and expenses.

Due to the methods being used to gain exposure and the fees and expenses, these products are not intended to be held for long periods of time and will lose value due to contango and other factors at play. Therefore, NSPY and NIWM are not necessarily intended for long-term buy-and-hold investors, although they can be. These ETFs will primarily be used to hedge against risk or purchased daily by traders whom want broad exposure to the overnight market.

Both funds went live the last week of June 2022, so performance data is not yet known. However, we do know that each fund has an expense ratio of 0.55%, which is much higher than index-tracking ETFs, but about in line with a niche fund offering very special exposure.

There are not currently any ‘overnight short’ ETFs available to investors, likely because Alphatrai Funds, the issuer of both NSPY and NIWN, believes the overnight market is more bullish. But, if you are insistent on being short overnight, you could always short these ETFs and buy put options contracts, if and when options become available for these funds.

If you are invested long term in stocks, you already have ‘overnight’ exposure, since you are not likely buying at the open and selling at the close each and every day. However, even for long term investors, having a way to ‘hedge’ risk when the market is not open each evening, or maybe even more importantly during the weekend, is always nice and may help you sleep better, especially during times when the market is abnormally turbulent.

Matt Thalman
INO.com Contributor
Follow me on Twitter @mthalman5513

Disclosure: This contributor did not hold a position in any investment mentioned above at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

Picking the Right ETF to Avoid Contango

Posted on by Matt Thalman

Exchange-traded fund investors who buy and sell inverse products regularly know what contango is. But the average investor probably doesn’t understand the ins and outs of contango and how it can hurt an investment.

With a little knowledge, you can actually use contango to your advantage and profit from an investment that is actually losing value.

What is Contango?

In a nutshell, it is the cost of purchasing futures contracts, options, and derivatives. When you invest in a leveraged exchange-traded fund, in order for the fund to gain that 2X or 3X leverage, it must buy monthly futures and options contracts.

Then towards the end of the month, the fund will sell its current contracts with very near-term expiration dates and purchase the following month's contracts that have a longer expiration date. In the process of doing this, the fund will sell a lower-priced contract and then buy a higher-priced contract.

This occurs because the further out the expiration date on an options contract, the more expensive the contract will be. This is because the buyer of the contract has time on their side and the seller is taking on more risk because the value of the underlying asset has more time to make a large move.

Since the price of the further dated contracts is always more expensive than what the fund is selling their current contracts for, the fund is constantly burning money. This money burn, is called contango. The money being ‘burned’ is literally reducing the amount of money the fund has to invest and, over time, causes the price of the ETF to slowly shrink. For example: a $25 ETF will only be worth say $20 over the course of a few months, even if the underlining investments that the fund tracks stayed absolutely the same during that whole period of time.

On a one-day basis, contango isn’t usually seen or felt by investors, but over the course of a few weeks or even months, it would definitely be felt.

How to Make Contango Work For You

One method of taking advantage of this contango money burn is too ‘short’ the different ETFs that experience this phenomenon. However, shorting stocks may not be in the cards for all investors because it is risky and capital intensive, especially when you are trying to short an investment over a long period of time.

Another, slightly lower risky way and with substantially lower capital outlays, is by purchasing put options in ETFs that experience high levels of contango. Buying put options is just slightly less risky since straight shorting a stock can actually end up costing an investor more than a 100% loss.

With put options, your max pain is 100% loss. If you short a stock and the stock runs higher, you could actually lose more than 100% of your initial investment since the stock price has no cap. Options are still risky, but again just slightly less risky.

So how does that work? Let’s say you want to short the Invesco QQQ Trust (QQQ), essentially the Nasdaq index. But you don’t want to just short it, you really believe it is heading lower so you want a little leverage.

You find the ProShares UltraPro Short QQQ ETF (SQQQ). This is an ETF that is 3X short the QQQ or the Nasdaq. The SQQQ will go higher in price when the Nasdaq goes lower. However, the SQQQ experiences contango due to the way it produces its 3 times leverage.

Now the ProShares UltraPro QQQ ETF (TQQQ) is the opposite of SQQQ. It gives investors 3X leverage to the upside of the Nasdaq or the QQQs. If you have a strong conviction that the Nasdaq is heading higher, the TQQQ is for you. But once again, contango will have an effect on your TQQQ returns if you hold it for more than one day.

Your option to not only avoid contango but also to make it work for you is to buy put options contracts in the TQQQ or the SQQQ depending on which way you think the Nasdaq is going to go.

The way these work is buying put contracts on the opposite ETF than the way they are designed to move. If you think the market is heading higher, you would normally buy the TQQQ ETF. But if you want to avoid contango, you actually buy the SQQQ put options. This is because if the market goes higher, the SQQQ will lose value and at the same time contango will be lowering the price on a daily basis just slightly.

Now if you think the Nasdaq is going lower, you would buy put options on the TQQQ, since this ETF will go higher if the market goes higher and lower if the market falls.

I am just using TQQQ and SQQQ as examples, but you can do this with any leveraged ETF that is going to experience contango. Also, you need to remember, contango will only affect an ETF's price if you are holding the ETF for a period longer than one day. And even if you hold it for just a few days, the effect will not typically be noticeable. This strategy is going to produce the best results if you plan to own the put options for a few weeks or months.

Matt Thalman
INO.com Contributor
Follow me on Twitter @mthalman5513

Disclosure: This contributor did not hold a position in any investment mentioned above at the time this blog post was published, but he does buy and sell put options in the TQQQ and SQQQ ETFs from time to time. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.