Structure Matters: O’Neill On Geared ETFs

June 03, 2014

Weiskopf: Which goes back to the prospectus as well. Is there a section in the prospectus that highlights the volatility analysis?

O’Neill: There is all sorts of information in the prospectus about how the funds work and the risks associated with them. These are risky products, and investors should not buy them unless they know how they work.

There are volatility tables in there, there are graphs showing you what happens if market volatility is high and how you’ll experience decay associated with daily compounding. The prospectus is full of risk factors. People should read them.

If you read those risk factors, what you begin to realize is you should never buy one of these products and go away for three months. That is not the way you use these products. If you’re unwilling to give them some attention on a daily or at least weekly basis, you shouldn’t use the products.

Weiskopf: How do you think people should trade these in the context of implementing the trade? The trader says, “OK, I want to be long FAS.” Market order?

O’Neill: I think the type of order is dictated by the product, the market and it depends on the day. People should look at the volatility, look at the liquidity and if they see something that is penny-wide, they can put in a market order for a few hundred shares.

If you’re buying a product that has spreads that are wider than a penny, and if the product is newer or just doesn’t yet have the kind of liquidity that the big levered ETFs have, then I would definitely use a limit order.

But I think traders should recognize that they’re in control. If a market is deeply liquid and it’s trading penny-wide, market orders are probably fine. If it’s not the case—and this isn’t true just for levered ETFs, it’s for anything—they should also pay attention when markets are open and be very careful with market on close orders or the open.

Traders need also to check normal volumes relative to their order. It’s not that the order can’t get done seamlessly, but people need to know there are special traders or market makers on these securities whose job is to facilitate trading on a profitable basis to them.

Weiskopf: Thanks, Dan. I feel like I have a new friend and his name is vol, but clearly he’s hiding for now. Careful for what you wish for!

Dan Weiskopf is a portfolio manager of Access ETF Solutions LLC, whose third-party ETF strategies are offered through IPI Wealth Management, Inc. (IPI). At the time of release, the Access ETF Solutions Tactical Fixed Income model portfolio’s owned the Direxion inverse 20-year Treasury ETF (TYBS). This strategy is designed to mitigate against the impact of higher interest rates through tactical investing.IPI is an SEC-registered investment advisor, with its principal office located at 226 W. Eldorado St., Decatur, IL 62522, 217-425-6340. Access ETF Solutions LLC was established in 2013 with a focus that structure matters in selecting ETFs. Access ETF Solutions LLC is not affiliated with IPI.

References to specific securities or market indexes are not intended as specific investment advice. This interview should be viewed as an educational piece. All interviews have been approved for release by the individual and the individual’s affiliated firms and the information is for institutional investors only. Readers are advised to read the full transcript of the interview including disclosures at or contact Dan Weiskopf at 212 628-4882.


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