ETF TrendTracker Review

[This update originally appeared in the Weekly Update of our sister web site, TSX TrendWatch , in March before this site was launched. The entry is every bit as applicable here as it continues to be there.]

In times of turmoil like this, it’s sometimes worth considering some opportunities to take advantage of downward moves without the risks of selling stocks short.

Stock and index options are one obvious choice, but many investors aren’t willing to take the time to learn the complexities of derivatives.

ProShares Advisors LLC offer two exchange traded funds (ETFs) that not only let you pick the direction of the market, but offer you some leverage as well if you’re sure you’re right.

Both the Horizons BetaProS&P/TSX 60TSX 60 Bull Plus ETF (Symbol: HXU) and the BetaPro S&P/TSX 60 Bear Plus ETF (Symbol: HXD) are based on the S&P/TSX (LargeCap) 60 index… but they are designed to double the prices moves in that index either up or down. This first chart demonstrates that they seem to be working as they should.

We used the iShares S&P/TSX 60 as a basis for comparison (Symbol: XIU). XIU tracks the S&P TSX 60 index directly without any adjustments. We used percentage price changes to make the comparisons, since the Bull and Bear ETFs started at $25 in January, whereas the much older XIU was already up around $75.

You can easily see that the price moves in HXU and HXD, the Bull and Bear ETFs, are much wider than the XIU. Nonethless, it’s not clear how much the new ETFs are really living up to their promise of doubling the XIU move up and down. So, to look into that further we prepared a second chart…

What we did was simply double the XIU price moves for each week to determine what the HXU and HXD should have been theoretically and compared those values with the actual data. The chart is a bit difficult to read mainly because the match is so close that the lines overlap most of the time. We found that the average weekly differences between theoretical and actual values was about 0.15%. It’s safe to say that these investment vehicles are performing as they should.

It’ll be some time before we can factor in the results of distributions (dividends), trading commissions and other transaction costs, but we already know that the management expense ratio (MER) is relatively high for the Bull and Bear funds at 1.15%. The MER for XIU is just 0.17% by comparison. Nonetheless, the extra MER may be worth it for the net gains if you make the right call at the right time.

Finally, you don’t necessarily have to be pessimistic long-term to use the Bear ETF. Suppose you have a portfolio positioned for longer-term gains, but you’re about to leave for a two week vacation. You could purchase some HXD (Bear) shares before you leave as insurance. If the market dips while you’re gone, the gains from HXD will at least partially offset losses in your stock portfolio. Of course, if the market continues upward, you’ll lose some value in the Bear ETF by the time you get home.