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General Body Meeting

General Body Meeting. 2/25/14. Discussion Materials Prepared By: The Executive Board. Brain Teaser. How many streetlights are there in NYC?

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General Body Meeting

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  1. General Body Meeting 2/25/14 Discussion Materials Prepared By: The Executive Board

  2. Brain Teaser • How many streetlights are there in NYC? • Let's start by estimating lights on the ordered grid of Manhattan. Estimate the number of horizontal blocks and vertical blocks, and then the number of street lights on each. Then multiply by 5 to account for the other 5 boroughs. • It turns out there are approximately 300,000 street lights in NYC, according to NYC.gov. 

  3. Investment Challenge

  4. Investopedia Word of the Day ETF: A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETF’s experience price changes throughout the day as they are bought and sold. Things to Note: • Does not have its net asset value (NAV) calculated each day like a mutual fund • Able to short sell, buy on margin, and buy as little as one share • Most widely known ETF is the SPDR SPY ETF, which tracks the S&P 500 index • Not to be confused with ETN’s which are unsecured, unsubordinated debt securities that combine aspects of bonds and ETF’s. They are based upon the performance of a market index, but lack coupon payments and no principal protection exists.

  5. Advantages of ETFs • ETFs are traded like stocks • Intra-day price movement • Investors are able to short-sell and buy on margin • Can manage risk by buying futures and options just like a stock • Portfolio diversification and Risk management • Traded on virtually every major asset class, commodity, and currency in the world • Easiest way for retail investors to gain access to otherwise restricted markets i.e. EM, alternatives, and currency and commodity to a degree • Low expense ratios • Vanguard 500 Index Fund (one of the lowest of the low-cost index funds) VS SPDR 500 ETF • Vanguard expense ratio: 21 bps • Average MF expense ratio: 100+ bps • SPDR 500 ETF expense ratio: 9.5bps (45% lower than the cheapest index fund)

  6. Disadvantages of ETFs International Limitations • The U.S. has many ETF products, but some countries only have a few exchange traded funds in which to invest. Also, the regions that do offer Market ETFs usually only include large-cap products leaving a lack of mid and small-sized funds. Low Trading Volumes • When ETFs have low trading volumes, the advantage of purchasing and ETF over and index or equity diminishes. The bid-ask spread can be too wide to be cost-effective. Market Makers tend to be tighter on securities that are more liquid. 5

  7. Liquid Alternatives • Sold as both MFs and ETFs • Seek to stabilize portfolios by delivering differentiated returns (the funds are designed to zigwhen traditional stock and bond markets zag) • Invest in nontraditional assets, such as global real estate, leveraged loans, start-up companies and unlisted securities • No income requirements unlike traditional HF and PE • Utilize complex trading strategies commonly associated with unregistered hedge funds and private equity funds: • Long/short equity, managed futures, market neutral, multi-alternative, multicurrency and nontraditional bonds • AUM in this space: $279 billion, up from $68 billion in 2008

  8. Specialty ETF’s Inverse ETF’s • Constructed using derivatives for the purpose of profiting from a decline in the underlying benchmark • Similar to holding a short position • Advantage: No margin is required whereas margin would be needed for short selling • Used primarily for hedging, but can be used for speculation Leveraged Up/Down ETF’s • Uses derivatives and debt to amplify returns on a given underlying index • Available for most indexes (Nasdaq-100, DJIA) • Attempt to keep a constant amount of leverage during investment time frame (2:1, 3:1 ratio) • Ex. If underlying increases by 1%, you gain 2% (3%) depending on the ratio • Leverage is a double-edged sword

  9. Specialty ETF’s VIX ETF’s • Since the VIX cannot be trade we are forced to trade other instruments • *VIX ETF’s are designed to track the CBOE Volatility Index futures contracts, not the VIX spot price • Many VIX trackers are actually ETN’s • Ex. iPath S&P 500 VIX Short-Term Futures ETN (VXX) ProShares VIX Short-Term Futures (VIXY) ProShares Ultra (2x) VIX-Short-Term Futures (UVXY) • Exposes investors to the negative roll yield related to rolling futures as they near expiry • Contango risk Derivative ETF’s • Consist of derivative contracts like futures, forwards and options • Ex. Covered call ETF. Buy securities exhibiting high implied vol and sell calls against the underlying shares

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