Content provided by J.J. Schenkelberg
ProShares Short S&P 500 ETF (SH) is a position we use in portfolios in order to obtain a targeted risk score with a diversified approach to the overall allocation. The year-to-date position has negative performance, but SH should not be looked at individually, it should be reviewed in the context of the entire portfolio.
Like many portfolio managers, CLS also had a positive equity market expectation coming into 2014. We hold SH as part of our “creative diversification” theme that seeks investment opportunities to minimize interest rate risk. We were also not alone in our expectations for rising interest rates, but this is where the allocation missed its mark. In hindsight a conservative bond position, or more PowerShares Exchange-Traded Fund Trust II (BKLN), in our portfolios, would have been beneficial. However, if interest rates fall, a combination of a long/short equity position is likely to outperform bonds if they are negative.
Keep in mind, in our risk budgeted portfolios the short position does not equate to a bond position. The short position has a risk score that is negative the equity market, or approximately -1.0, versus cash or bonds that are close to 0. So, if we sell the SH position we would also have to sell long equity positions in order to purchase cash or bonds.
With this in mind, if we were to utilize bonds, rather than the inverse position, we would have given up significant upside in equities as well as escaped the negative return from SH. Additionally, for most portfolios, the long/short equity positioning is only a portion of the conservative part of our portfolios. All but the more aggressive portfolios also hold diversified positions in bonds, particularly in preferred stocks, high yield bonds, and BKLN. All of which have done very well so far in 2014. The portfolios are further diversified into investment grade bonds as well.
The bottom line is that SH is part of an entire portfolio strategy, not a strategy in and of itself.
This material does not constitute any representation as to the suitability or appropriateness of any security, financial product or instrument. There is no guarantee that investment in any program or strategy discussed herein will be profitable or will not incur loss. This information is prepared for general information only. It does not have regard to the specific investment objectives, financial situation, and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that security values may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not a guide to future performance. Individual client accounts may vary. Investing in any security involves certain non-diversifiable risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk. These risks are in addition to any specific, or diversifiable, risks associated with particular investment styles or strategies.
An ETF is a type of investment company whose investment objective is to achieve the same return as a particular index, sector, or basket.To achieve this, an ETF will primarily invest in all of the securities, or a representative sample of the securities, that are included in the selected index, sector, or basket. ETFs are subject to the same risks as an individual stock, as well as additional risks based on the sector the ETF invests in. Bonds are a type of debt instrument issued by a government or corporate entity for a defined period of time at a fixed interest rate. Bonds may be subject to unsystematic risks including, but are not limited to, call risk and reinvestment risk. High yield bonds, or junk bonds, will be subject to an even greater degree of these risks as well as subject to the credit risk. The holder of a short position is bearish on the price of some asset, or expecting the price to fall. The opposite of a short position is a long position. An investor with a long position in an asset is expecting the price of that asset to rise. Preferred stock is stock that is senior in claim to common stock. Generally, preferred stock will receive dividends prior to common stock. Diversifiable risks include, but are not limited to, opportunity risk and capital risk.
ProShares Short S&P500 seeks daily investment results, before fees and expenses, that correspond to the inverse (-1x) of the daily performance of the S&P 500®. PowerShares Exchange-Traded Fund Trust II is based on the S&P/LSTA U.S. Leveraged Loan 100 Index (Index). The Index is designed to track the market-weighted performance of the largest institutional leveraged loans based on market weightings, spreads and interest payments.