Hedging via The Double Short European ETF

As part of  CCI's new year resolution to more actively mange/hedge the portfolio of global country funds, CCI established a short-term position for hedging purposes in the double short European ETF (EPV) today.  Bought at $41.90 after commissions.   

Aside from the longer-term less than optimistic picture of Europe, this position was taken with the thought the whatever comes out of the latest European meetings in the next few days will be disappointing to the market.

Establishing some Hedges on Emerging Markets

One of he goals of CCI portfolios is to lose less in down markets, with the trade off being making less in up markets.  Last year, CCI's portfolio of non-US countries performed only slightly better than the global markets. (i.e. loss only a very little less).  It seems this just once again seems to prove the point that just trying to pick the right stock/country is not really enough to improve your risk/reward.  It seems like some amount of hedging needs to be done to improve a portfolio's risk/reward.   This year, CCI plans to put more hedges in place around global funds.  To that end, two option positions were established this week.

1). CCI has a full, long  position in the major Brazilian ETF (EWZ).  This fund is up about 10% so far this year.  An option position to hedge against a stall or fall in this market's rise was established.  Specifically an unbalanced butterfly spread was discussed on https://www.tastytrade.com.  Given the overall long position of CCI in EWZ this seemed to make a tremendous amount of sense.  Specifically a Feb $62/$63 - $66/$68 butterfly was established for a credit of $.94/contract after commissions. A few scenarios:

• Best case for this trade - the stock stalls in the $63 to $66 range and the portfolio pockets the $.94/contract (nearly 1.5% gain).  This is a relatively narrow range but is offset by the relatively minor impacts to the overall portfolio if the etf trades out of that range as defined below:
• Best case for the position - the stock rockers well past $68.  This trade loses $1.06/contract, but the long holding goes up substantially.  Admittedly, doing this trade will be a drag on performance, but the position will still be up nice;y
• Worse Case - The etfs falls below $62.06.  That is the break even for this trade and this trade will lose an insignificant $.06/contract.  However, the long portion of the portfolio will of course be down.

So this trade barely loses if the market falls, is a moderate drag on the position if the etf continues to soar, and enhances returns if the etf  consolidates at this level for awhile.

2). As previously posted, CCI started the year intending to build a position in the emerging market etf (EEM).  However, with this fund also increasing by 10% this year, CCI is thinking it might be time for some consolidation.  Hence, earlier this week CCI bought the Feb $38, $40, $42 butterfly for $.52.   This trade profits if EEM slides back to around $40 in the next three months.  This is a very modest position size and in essence what seemed like a fairly cheap way to be have some short exposure in the global portfolio. As of Friday, EEM is trading around $42.50.  So currently, this is not looking too good.

Using options to build a position in EEM

Frequent readers will recall that CCI had two international portfolio's in 2011 EEM2 and GSPY.
In 2012 CCI will be merging those two portfolios into one global portfolio.  The portfolio plans

• to continue to hold the 7 country etfs described in those funds
• to add in several other country funds
• to more actively trade/hedge this portfolio than done in 2011

As part of the last objective, CCI is working to build  a core position in a leading emerging markets etf (EEM) and trade options around this position to hedge the overall global country portfolio.

At the start of 2012, the portfolio is long one lot of EEM at an effective price of $38.33, and one lot of  naked Jan 6 (weekly) $38 puts.  Building on this position over the past two days:

• Sold the Jan $40 calls against the one lot of shares owned for a credit $.57
• Rolled the Jan 6 (weekly) $38 puts to Jan $38 puts for a net credit of $.55

Setting the details of the math aside for a moment.  

• There is about a 43% chance (according to option theory) that EEM will be trading below $38 at Jan expiration and CCI will be the proud new owner of a second lot of EEM.  Since there is a good chance this may happen an investor really needs to be comfortable with this outcome.   Additionally, CCI will have collected $1.84/share (4.8%) in option premium to lower the cost basis.
• If the stock stays between $38 and $40 over the next few weeks, CCI will still collect the $1.84 option premium and own one lot of shares.
• If it rises over $40, CCI will collect the $1.84 in option premium, and make $1.67 on the first lot of shares being called away.

Q3 Results for EEM2

Near the beginning of the year, CCI was looking for ways to more globally diversify the portfolio.  I described a portfolio of three ETFs that I felt would diversify away from the US markets but have less risk than choosing a popular emerging market ETF such as  VWO or EEM .   A portfolio of 3 small cap, international ETFS all of which focus on the emerging consumer while trying to be less dependent on China than standard emerging market etfs was developed.  The portfolio, called EEM2, is described in the article here.   It consists of a wide ranging emerging consumer etf econ and small cap etfs for Brazil brf and India scin .

Diversifying away from the US to emerging markets around the beginning of the year was a bad idea.  The emerging market etf VWO is down 25.6% this year.   Far worse than the US market.  The Chinees ETF fxi is down more, about 27.3% including dividends.  EEM2 performance was similar, but better. Down 24%. 
The performance of the Brazil and India etfs were both large drags on performance, both down well over 30%. Econ performed better (less bad) and CCI still likes the make-up of the fund.  It seems to put a focus on companies that might serve the emerging middle class in a wide variety of countries.   CCI plans to stick with this portfolio for now.  However, it is possible that we may add to the ECON position and close the Brazil and India portions for tax losses in q4.

Q3 Results for GSPY

Near the beginning of the year, CCI was looking for ways to more globally diversify the portfolio.  I described a portfolio of four ETFs that I felt would diversify away from the US markets but have less risk than choosing an emerging market ETF such as  VWO .   The portfolio consisted of country etfs from Brazil ewz, Canada ewc, South Korea ewy, and Switzerland ewl.  I called that portfolio globalized SPY (S&P500) or GSPY and rationale for those specific countries and how they might work together is described at the original article here.

Let's start with the bad news...ok really bad news.   Diversifying away from the US markets to almost anywhere else in the world as of the beginning of the year was a bad idea.   Seems like the US is viewed as a safe-haven...imagine that.

The following data includes dividends. While the S&P 500 is down around  8.7% for the first three quarters, the emerging market etf VWO is down about 25.6% .  OUCH.   The "good" news is that GSPY is down only 21.2%.  OK that's not really good news.  However,  if the objective was to move away from the US and perform better than the emerging markets then the portfolio has met its goal .  Additionally the monthly standard deviation for GSPY is 6.3 vs. 7.3 for VWO (still volatile, but less volatile). Correlation of GSPY with VWO is .98. (real high).

GSPY performance was hurt badly by its acknowledge overweight in the materials sectors of the market, and the pegging of the Swiss Franc by the Swiss government.  CCI is sticking with the portfolio for now, but will be considering adjustments and/or  tax loss selling in the fourth quarter.  

Emerging Market Consumer Portfolio (EEM2) Q2 Results

Complete information about the objective and make up of the EEM2 portfolio can be found at

http://seekingalpha.com/article/258012-don-t-let-your-emerging-market-position-catch-a-cold

In summary the objective of this portfolio is to outperform an emerging market ETF such as VWO by holding several ETFs that focus on the emerging middle class while having less exposure to China (FXI) than most emerging market investments.  Performance for the second quarter of 2011 was

• eem2 - plus 3.6%
• vwo - minus 0.67%
• fxi - minus 5.6%

Clearly a nice outperform for the first quarter of this portfolio operations.  However, one quarter's data is not that significant. While the performance has been good, the volatility has been high and most of the returns have come from one holding, the emerging consumer market ETF (ECON).  

CCI plans to continue to hold this portfolio for now, but may make adjustments to the composition over time.

Q2 Resutls for GSPY - Global diversification with less risk than emrging markets

Version 2 of this post.

The detail rational and objectives of the Globalized SPY  (GSPY) portfolio can be found at

http://seekingalpha.com/article/247845-globalizing-spy-how-to-diversify-without-adding-emerging-market-risk  
The objective of this portfolio is to provide diversification from the S&P 500 (SPY)   via a portfolio that provides better returns with less volatility and risk than using the very popular emerging market ETFs such as VWO  (VWO) to provide portfolio diversification.

Basically, this portfolio is a mix of ETFs of the following countries:

• Canada (EWC)
• Switzerland (EWL)
• Korea (EWY)
• Brazil (EWZ) 

For the first half of the year the portfolio's performance has not been great. Specifically;

• GSPY has lost -.2% while VWO is up 1% for the year.
• GSPY has been less volatile than VWO with a monthly SD of 2.6% vs. VWO's monthly SD of 3.6% and it seems to make common sense that these larger more established countries and companies shold be less risky than other emerging markets.
• GSPY and VWO have shown a high correlation of 94%
• GSPY underperformed the S&P 500s return of 5.5% YTD.  The positive spin on this negative comparative result is that GSPY is showing a -.20 correlation with the S&P500.   In reality this type of  negative correlation is the objective of  diversification.    Hopefully this negative correlation will continue if/when the S&P500 has a down period.

A half years results is not enough to draw any long term conclusions, but overall results are mixed at best.   However, the negative correlation with the S&P 500 provided by this blend of blue chip dominated companies still seems like it could provide a good balance the the S&P500, so CCI plans to continue to hold and monitor this portfolio.

GSPY Portfolio 2011 Q1 Performance

The detail rational and objectives of the GSPY fund can be found at

http://seekingalpha.com/article/247845-globalizing-spy-how-to-diversify-without-adding-emerging-market-risk

In summary this portfolio is a mix of Canadian, Swiss, Brazil and Korean ETFS whose objective is to be a better, more global diversification alternative to the S&P 500 without the risk of very popular emerging market funds such as VWO.

In the first quarter of operation the portfolio's performance generally met its objectives. Specifically GSPY

• Returned 3.6% which was better than the return for VWO (1.6%). The fund did under perform the S&P 500s return of 5.9%
• Had volatility as measured by monthly standard deviation of 2.4 % which was significantly less than VWO's monthly standard deviation of 4.5%, but more than the S&P 500's 1.7%.
• Provided excellent diversification with a -.50 correlation with the S&P 500 while having a .94 correlation with VWO.

One quarter of results is clearly not enough to draw any conclusions, but the first quarter results are consistent with expectations for this portfolio.

Portfolio - EEM2 - 2011 Q1 Performance

Complete information about the objective and make up of the EEM2 portfolio can be found at

http://seekingalpha.com/article/258012-don-t-let-your-emerging-market-position-catch-a-cold

In summary the objective of this portfolio is to outperform an emerging market ETF such as VWO by holding several ETFs that focus on the emerging middle class while having less exposure to China.

These positions were just established so performance data is not significant, but performance for the month of March was

• eem2 - 7.4%
• vwo - 5.5%
• fxi - 7.9%
  

If China sneezes, don't let your emerging market portfolio catch a cold.

There is an old saying in the world of global investing: "When the U.S. sneezes, the world catches a cold." Today, the U.S. is still recovering from a cold and U.S. consumer does not appear to be the engine of growth they once were. On the other hand, the huge population in China that is moving towards the middle class is a key driver of global demand. Hence, it seems that "When China sneezes, the world catches a cold” may be the more relevant saying today.

With today's news cycle focuses on issues in the middle east, news about China seems to be pushed to the background. However, it is possible that China may be facing some headwinds that would adversely impact an investor's portfolio and emerging market positions.

Read more about an approach to maintain exposure to the trend of an emerging middle class across the world while minimizing exposure to China at

http://seekingalpha.com/article/258012-don-t-let-your-emerging-market-position-catch-a-cold

This approach may be just what the doctor ordered to keep your investments in emerging markets from catching a cold if China sneezes.

Portfolio - Globalized SPY (GSPY)

Looking for a investment that provides country and currency diversity from a S&P 500 index fund that

• avoids the high risk emerging markets
• avoids the stagnating economies of the Eurozone and Japan
• is easy to implement
• has outperformed the S&P 500 over the past 1, 3, 5, and 10 years.

This can be accomplished through the use of four simple etfs. Read all the details about this approach at

http://seekingalpha.com/article/247845-globalizing-spy-how-to-diversify-without-adding-emerging-market-risk