If you hold the products mentioned in the title of this post, such ETF products are a legal license to have money stolen from you, specifically in the rollerover mechanism.
There are ways to mitigate this (i.e. involve the rollovers continuously over a longer period of time), but this mitigation removes linkage between true spot pricing and the underlying ETF value.
Also if the ETF is a small fraction of the underlying market, then it doesn’t matter. Life can go on as normal. However, in today’s modern era, there are huge amounts of money swimming around in ETFs, waiting to get picked away by professional traders.
USO was a great example last month. ETFs that blindly were forced to short the short-term month and long the second month – this came in all sorts of forms other than USO as well. Retail oil investors in China, for example, got duped into this. As a result of the widely known rip-off (culminating in the negative 40 dollar futures price), such ETFs were forced to reform their practices to make their trade rip-offs less obvious. Most of them do it much more slowly.
But there are other examples.
Right now I have something on my quote screen that is so glaringly abberant that I had to wipe my glasses and double-check to confirm it was there. It’s something that institutional traders can take great advantage of (quantitative hedge funds must be making a fortune right now) but ol’ retail people such as myself can take some minor benefit to it, being restricted with the amount of margin to put up with such trades.
This chart is a relationship between two financial products. It should not be above zero (it can be at times, but right now is not a circumstance it should be above zero). But it is.
When checking some ETF databases, I can see why this is the case. There’s just too much money moving out of the front month to the second month, especially in relation to the ETF size versus the actual market size.
I’m purposefully vague here because this is clearly an actionable idea.
The lesson for people here is that investing in the wrong ETFs are financially hazardous. But this has always been the case. Just that the inherent structure of certain ETFs always lead to the same outcome – getting your pockets picked by traders.
Intriguing. Perhaps you can fill us in on the details once the relationship reverts to zero.