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Posted by on Jul 13, 2017 in ETF Strategist, Featured

Even The “Experts” Get It Wrong Occasionally

Even The “Experts” Get It Wrong Occasionally

By Roger Nusbaum, AdvisorShares ETF Strategist

A friend was lamenting about the difficulty he was having getting “look through” information on closed end funds and ETFs, specifically bond funds, and calling into his online brokerage firm for help didn’t yield much better results. Closed end funds not necessarily being transparent isn’t news and while I am surprised he had the same difficulty with ETFs. Perception is reality so perhaps he perceived a lack of information for the ETFs he was interested in.

A few weeks ago, Barron’s ETF column was titled Finding the Best Alternative ETFs with the context being what would help if both stocks and bonds crashed. One strategy the author liked in this scenario was funds that sell puts. Selling puts, if you’re worried about a crash is one of the worst things you can do…again, if you are worried about a large decline.

The best example of why this is, comes from the tech wreck. For a while, the options market appeared to be giving money away, you could sell a semi-deep out of the money put on a $300 stock and easily bring in a couple of thousand dollars. This worked for a time and then the crash came and put sellers were paying $250 for stock trading at $80 on their way to much lower prices. That’s permanent impairment of capital, Holmes. While I don’t expect that scenario to come around again (I don’t rule it out entirely) it paints a clear example of the risks inherent in the strategy. The time to sell puts would be after a crash not after the second longest bull market of the last hundred years.

I can only conclude that the author did not realize that put selling does not insulate from a crash, even if a 2001 redux is unlikely.

Long time readers might recall I am a big believer in alternatives (when I first started writing about them that term wasn’t in vogue and I called them diversifiers) but the Barron’s article is a great example of maybe not understanding what a given strategy can or cannot do for you.

The bigger point is about how we access information. Barron’s appeared get put writing wrong, licensed reps and online brokerages may not truly understand the nuances of exchange traded products (think ETF 201 or 301 versus ETF 101).

With so many more sources of ETF content and information now available, there is really a buyer-be-ware element that I don’t think existed 15 years ago. Part of the equation too might be that 15 years ago, ETFs were plain vanilla indexed exposure. Very plain. The moving parts behind put writing, currency hedging and managed futures (just to name three) are far more complex than a mid-cap index fund.

There certainly are good sources available to draw on. I choose to believe that ETF providers can explain their strategies as well as have a thorough conversation about a fund’s holdings. There are content sources that get it right, Barron’s isn’t wrong like the above example very often but it isn’t infallible. If you can remember that all strategies have drawbacks then it becomes easier to keep digging until you find an explanation of what those drawbacks might be.