Thursday, July 20, 2023

"New ETF Says It Protects Against All Market Losses"

That was also the pitch of a Ponzi scheme we looked at some years ago.

From Yahoo Finance, July 19:

Innovator ETFs, the pioneer of so-called buffer funds, launched a new product this week that it says is the first to protect investors against all market losses.

The Equity Defined Protection ETF - 2 YR TO JULY 2025 (TJUL) began trading Tuesday, bringing the investment characteristics of variable annuities to the ETF market. The issuer is seeking to provide investors who have accumulated cash over the pandemic years with a suitable investment vehicle, the company said. Buffer funds are also known as defined outcome ETFs.

TJUL uses options to track the performance of the SPDR S&P 500 ETF Trust (SPY) over an approximately two-year period starting July 18, 2023. The options strategy it uses offsets all losses the S&P 500 incurs over that time, while capping gains over that two-year period at 15.06% after the fund’s 0.79% annual fees.

Investors have been hesitant about getting into the market this year. According to data from Morningstar, money market funds—an investment equivalent to cash—saw $598 billion in inflows through the end of June, compared to $72.7 billion in outflows from U.S. stock funds over the same period.

Some of those money market flows come from investors moving money from savings accounts due to fear over this year’s regional banking crisis, but the concurrent outflows in stock funds shows that investors are tending toward safety.

“A lot of advisors have clients who won’t invest and instead hold cash or cashlike instruments because they’re too afraid of losses,” said Tim Urbanowicz, head of research and investment strategy at Innovator. He said TJUL’s goal is to help investors who are scared of losses to get exposure to at least some of the market’s gains, while protecting them from market drops....


This July 2007 post, "Magical Markets, Enron and GE and a New Word":

I was looking for Alt/Renewable energy ideas a couple nights ago when I found a story in a middle-market newspaper that had a sentence in it that is now the front-runner for funniest line of the month:
"We protect against all losses through hedging"
Here's the set-up. Some forex guys just bought a $3 mil. historic mansion to run their business out of. They're doing some smaller scale Yen carry-trade "arbitrage" (retail min. $50K). They borrow from the BOJ at 1/2 point and say they invest at 5%. Looking at the yield curve, you have to go out seven years to get 4.99%. Borrow short-term, lend long-term.

Then they gear it up 2.7 times and are showing their investors 12% risk free. At that point in the story I started laughing so hard my eyes were watering.

Right now the 30-day treasury yield is 4.51%. That is the risk-free rate of return. That's the number you plug into your slide-rule to do options pricing.

If someone is offering you greater than 4.51% at 1:00 pm EDT on 5Jul07 you are, by definition, taking on risk. Period.

Now don't get me wrong, risk is good. Risk allows you to die with a garage full of stuff. Like a helicopter. In the garage. On your yacht. There was one with a 3000 square foot master suite offered on ebay last year for $168 million.

The second problem with the story is: the minute you use leverage you no longer have an arbitrage. You might still have a really, really good hedge, a six-sigma hedge; but it's not an arbitrage. Remember that wonderful term of the eighties "Risk Arbitrage"?
Only one of the words was accurate.

There are three types of people who would say "We protect against all losses through hedging"

1. A fool-they don't even understand the game.

2. A moron-they may have some nifty swaps and other derivatives to hedge against the one and two standard deviation event risk, but what about the 3,4 and 5 SD risks? Last night I heard a farmer in Kansas say "We had our last once-in-a-hundred-year flood in '86". Now that guy understands, I'd bet he knows more about markets than the folks at LTCM.
I'm sure the forex guys have the currency risk covered, they may even have something to cover a magnitude 9.5 Tokyo earthquake. But what if your counter-party had physical exposure you didn't even think of? Maybe their bullion vault was on the fault-line. There's no Force Majeure, only insolvency.

3. A liar.

The guys I traded with as a pup would right now be figuring out how they'd like to furnish the historic mansion in a middle-market-newspaper town that they just took from the 1, 2 or 3 above, forex guys....

That was followed three years later by this when the perp went down:

The Dénouement: Perpetrator of $190 Million Minneapolis Foreign Exchange Ponzi Scheme Sentenced

And then in two more years they rounded up the bit players who steered the marks to the scam:

Ha! Three guilty in $194 Million Ponzi scheme