ETF hedged

betonit

Hi, Im looking to invest in a high dividend large cap US etf. Im thinking the market could nearing the top and would want to protect the capital side. I have looied at the composition of a few etfs. Just wondering are there etfs which hold these large cap stocks but can also that hedge against a drop in the market via derivatives or sell off the assets and then buy them back. Would you get that detail from the promoters??

Mr.David

If I understand you correctly, what you are saying is that you want to have a net exposure only to the dividend with the stock component being fully hedged.

This can be achieved using derivatives, specifically by selling a combo (so you are selling a call option and buying a put option of same strike price). The payoff from a combo differs only from that of stock by the interest and dividend exposure. So in effect you are selling stock through the combo (to hedge) but holding onto the interest/dividend risk on which you are making a bet.

You will then realise a profit if dividends are higher than the market has already priced in, or alternatively if interest rates drop below current/expected levels.

Its a very specific bet, you will not benefit if dividends are in line with current expectations.

betonit

i suppose that wouldnt leave much profit after tax and probably incur alot of fees.

Its just that i was looking at silver etf and its strategy was buy silver and hold it, I thought because it was "actively managed" it would trade it buy/sell a proportion then make profit in volatility for that portion etc.

So really if a large cap etf holds x amount of shares will they just hold those assets regardless of a falling market, or would they sell hold cash, ie no dividends for a period but the capital is protected and then buy back in, do they go to that extent?

simongurnick

betonit wrote: »

i suppose that wouldnt leave much profit after tax and probably incur alot of fees.

Its just that i was looking at silver etf and its strategy was buy silver and hold it, I thought because it was "actively managed" it would trade it buy/sell a proportion then make profit in volatility for that portion etc.

So really if a large cap etf holds x amount of shares will they just hold those assets regardless of a falling market, or would they sell hold cash, ie no dividends for a period but the capital is protected and then buy back in, do they go to that extent?

It depends what the etf is designed to do. If you are talking about silver, then SLV, is an etf that is designed to track the spot price of silver, so in that case it will follow the market in either direction.
Most quote soures for ETF's should have a link to the prospectus or an investor relations phone number...probably your best bet.

betonit

simongurnick wrote: »

It depends what the etf is designed to do. If you are talking about silver, then SLV, is an etf that is designed to track the spot price of silver, so in that case it will follow the market in either direction.
Most quote soures for ETF's should have a link to the prospectus or an investor relations phone number...probably your best bet.

Got a response from wisdomtree only, its only the currency they hedge ie a dollar based fund buying euro assets would hedge against the currency move.
By other prospectus seems to be the case.
They dont seem to get out and back in depending on falling and rising markets. I just thought there would be that level of active management.
In this case may be better of looking at the top 10 holdings of a desired etf then just buy them and hold them... using a US broker $5 trade and all that.

Also looking at dividend capture strategy ... going to monitor the price of chevron today (gone ex) . Historically recovers fairly fast with some change. Theres tax issues around not holding the stock for 61 day but with the DTA etc worth some research... beats watching tv

Bateman

Actively managed ETFs are less than 1% of the market, definitely sounds like something that would have to be managed personally/manually

rekhib

Generally ETFs are index trackers. If you want a more actively managed strategy, you could opt for a mutual fund or hedge fund.

Bateman

rekhib wrote: »

Generally ETFs are index trackers. If you want a more actively managed strategy, you could opt for a mutual fund or hedge fund.

In theory, there should be no reason why actively-managed low-cost ETFs shouldn't take off in Europe the way they have in the US. In practice, we all know what the reasons are.

rekhib

Bateman wrote: »

In theory, there should be no reason why actively-managed low-cost ETFs shouldn't take off in Europe the way they have in the US. In practice, we all know what the reasons are.

Absolutely, fully agree. Even the index tracking ETFs in Europe aren't quite as low cost as the US just yet. Deutche Bank have made a decent attempt at keeping costs down but I think most of their ETFs are swap-based rather than physical replication.

On the plus side, we can buy capitalising ETFs which are off-limits to US investors - every cloud and all that!