They have to be loving this summer's stock market drubbing over at the ETF company BetaPro Management.
"Our record volume days are days that show a lot of red on the screen," said Howard Atkinson, the firm's president.
Take Monday as an example. As oil prices plunged and the S&P/TSX composite index did likewise, the 26 exchange-traded funds in the Horizons BetaPro lineup (two more were added Wednesday) posted total trading volume of more than 16 million shares, the second highest yet for the company and an astronomical number by the usual standards of the Canadian ETF market.
HBP started the year with $500-million in assets and today it runs more than $1.8-billion. The reason: This family of ETFs offers an efficient way to profit in a down market, and both retail and institutional investors are starting to embrace them. Do not for a second imagine that the funds are mass-market products along the lines of other ETFs, however. In fact, they're somewhat sophisticated investing tools that can confuse and disappoint unwary investors.
HBP's funds cover 14 different stock and bond indexes and commodities. For each, you can buy a bull fund to profit in rising markets and a bear fund to benefit from falling markets.
Both the bear and bull funds differ from traditional ETFs in that they're leveraged. This means they use financial instruments called derivatives to offer double exposure to the markets so that a 1-per-cent move in the underlying index is supposed to give you a 2-per-cent change in your fund.
Think of the bull fund as a turbocharged version of existing ETFs and mutual funds. If the market rises, so does this fund. Bear funds gain ground when the market falls, and they fall back when it rises. Think of them as a simpler alternative to traditional down-market strategies like short selling and options.
Several HBP funds have been around for more than a year now and they've performed in a way that has generated several e-mails from readers questioning why returns sometimes deviate from two times the underlying index.
Let's go back to Monday's market mayhem, when the S&P/TSX 60 index of large-size blue chips fell a bit more than 1.9 per cent. You'd expect the HBP S&P/TSX 60 Bear Plus to have made about double that and the S&P/TSX 60 Bull Plus ETF to have lost the same. In fact, the price of the bear ETF rose 2.6 per cent that day while the bull fund lost 2.6 per cent.
Longer term, there are even more discrepancies between what HBP ETFs return and what you'd expect from their mandate to deliver two times the index. For the year through Thursday, the 60 index was up 1.6 per cent while the S&P/TSX 60 Bear Plus ETF was down 8.6 per cent and the bull plus fund was up 1 per cent.
Herein lies an important lesson for investors interested in HBP's lineup of bear ETFs at a time of broad market weakness. These products do in fact let you profit in down markets, but results can vary for a couple of reasons.
First of all, these ETFs are designed so that their net asset value represents two times the inverse of a change in the underlying index (market is up down 1 per cent, the NAV rises 2 per cent). Ideally, the NAV would be the same as the share price. But in practice, the end-of-day price for HBP ETFs can sometimes be somewhat higher or lower. Mr. Atkinson said this is not unusual for ETFs of all types, and he noted that daily closing share prices typically snap back into line with NAVs at the beginning of the next trading day.
