Alpay Kaya, CFA

La vérité existe. On n'invente que le mensonge. —Braque (Truth exists. One only invents falsehood.)

The Value in Volatility: A Practitioner’s Guide to Leveraged ETFs

coverValueVol_175w_280hFor three decades since the early 1980s, two seismic macroeconomic shifts have supported the buy & hold returns of equity investors.

• Interest rates have decreased, the 10-year rate from a record high of 15% to a record low of 1.5%.
• The fraction of US GDP transferring to corporate profits has increased from a record low of 3% to a record high of 12%.

These record-setting trends, and their part in driving equity values higher over the past 3 decades, should not be expected to continue. Even if the factors were to level off and hold steady, the beneficial trend will have been broken, eliminating macroeconomic support for the buy & hold approach to equities investing. And if these trends reverse. . .

Going forward, investors will need to earn returns from strategic investing; literally, buy low and sell high. Every investment strategy requires some understanding of financial math. The returns of leveraged ETFs (differing from those of standard ETFs) represent just the right generalization of single-name stock price evolution such that understanding LETFs engenders a fundamental understanding of market assets.

Take for example the oft-repeated adage about volatility being a drag on the returns of all assets: readers of VALUE IN VOLATILITY will not only know it is false but will be wise to the flaw in the thinking (and math) of those who believe it.

This is NOT an electronic version of the paper book LEVERAGED ETFs: HOW BIASED STATISTICS AFFECT YOUR PORTFOLIO by the same author. Although based on that text, Value in Volatility is a simplified edition that goes easy on the math. The important results,

• How to estimate an asset’s future price distribution;
• Why LETFs decay & why short/inverse LETFs decay more (and by how much); and
• How return analytics are affected by leverage;

are all here, and a straightforward review of all necessary math is included. Clear examples related to markets and formulas easily implemented in spreadsheet software will help independent investors and finance professionals assess risk/reward objectively (and not just for leveraged holdings).

Investors must be mindful now more than ever: “Past performance does not guarantee future results.” Value in Volatility provides the knowledge and tools necessary to respond.


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This entry was posted on June 6, 2013 by in Authored Books and tagged , , , .
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