Exchange Traded Funds

I decided that I should probably know more about the Exchange traded Funds (ETFs) as they seem to be what I have gravitated towards for my intraday trading.

I have noticed some interesting correlations and some anomalies between the Horizons Beta Pro Global Gold bull and Bear funds and the actual Global Gold index itself which lead me to do some reading to see if I could explain some of what I was seeing. I am not certain why but I was treating the bull and bear ETFs (HGU and HGD respectively) as if they were separate stocks and using the S&P TSX Global Gold index for reference. This has not been working for me as well as I anticipated.

So, the short story is that the two funds that I am playing with are inverse funds and leveraged by 2 times.

Horizons BetaPro Global Gold Bull Plus Exchange Traded Fund, HGU on the TSX.

The fund is directly tied to the performance of the S&P TSX Global Gold Index and leveraged 2 times. I thought that a leverage like this was a direct calculation of 1 penny equals 2 pennies so I had some trouble imagining the valuation of the fund compared to the stock and envisioning the movement it just looked wrong, so now I will clarify this.

If the Global Gold rises by 1 % then the ETF rises by 2%. So each $100 invested will return $2 at the end of the day. If it drops by 1% the the fund drops by 2% and you lose $2.

Unlike a stock using margin as leverage this does not put you in the situation of having a margin call and potentially losing more than you put in as you can only lose a percentage of what you invest, similar to a stock bought with cash.

The next day you start out with $102 and it rises 1% again, the ETF rises 2% and you gain $2.04. Effectively compounding daily. The reverse scenario has you losing $1.96. Again this is not unlike a regular stock as a daily percentage change is still based on the day's opening price.

Horizons BetaPro Global Gold Bear Plus Exchange Traded Fund, HGD on the TSX.

Same as above in the reverse direction.

The interesting part about using these funds to trade, as I am, is that I should be able to track only the Global Gold index and make trades between the two funds, HGU and HGD, while only following the index and ignoring the funds themselves. I have been doing this part way as I have followed HGU mainly and traded HGD just by that chart and it seems to get me where I want when I want...even though the trade may not go in my favour the entry and exits are clean. Lately I have noticed the strength of the index at the various pivot points being more relevant than the pivot points in the ETFs. In order of relevance it turns out the the index is first, HGU is second and HGD is third.

Where this leads me is to using the one main chart and just "pretending" that a long position in Global Gold is a bull ETF buy and a short position in Global Gold is a bear ETF buy. The best part about this, down the road, is that I can hold open positions in both the bull and bear funds at the same time. In theory I could open a position in each of the funds with an equal dollar value and hold them all day long and sell at the end of the day and only be down by the commission...an almost 100% hedge.

This also leads me to adopt a strategy that is used in options trading and I thought about applying to ETFs a few months back but had some conceptual troubles with the possible trading plan. More on that another time...the short story is that it includes placing opposing limit orders and catching only the breaking ETF. It needs some work though.

Today being Friday I try to normally not trade, but I tried a couple of trades anyway, no luck, so I decided that I would wait this out and work on some historical charting to check my "One Chart" method. I see now that the price has really just wallowed about with no big moves except out of the gate.

Jeff.