4 Comments
User's avatar
Dartz's avatar

Thanks for another great post.

Regarding: "Why ETFs Might Be Unsuitable For Some Strategies", how might you apply this to a PSLDX? Or is this exactly what you were referring to when you said ETFs might not be a good vehicle for a stacked return strategy?

Expand full comment
Kris Abdelmessih's avatar

I'm not familiar with PSLDX. My steps would be to

1. Investigate myself and form some priors about how it could break

2. Consult people I trust for other views to help address my concerns and hear concerns I would have overlooked

Expand full comment
Dartz's avatar

Sorry, I wasn’t asking for stock advice. 



I was trying to use this as an example of “is an ETF a good place for a derivate strategy" to see if I was clearly understanding your concern concept.

PSLDSX is a mutual fund holds about 100% domestic exposure to equity as various derivatives, about 160% to long-term bonds and -1600% cash, so we're looking at a leveraged, balanced fund. The notional amounts vary over time, but essentially it’s a long fund with derivatives to hopefully increase risk adjusted returns. It has a 14 year history. NTSX is an ETF with a very similar approach.

 In both cases, the actual fund investment is pretty opaque. The funds tell you their approach, but not the actual derivative activity.

Again, I’m really trying to understand it this is the type of ETF where as you say, :

“Is the ETF structure, whose allure is transparency, the correct home for opaque, illiquid, or bi-lateral (ie there’s credit risk in the basket) instruments such as inflation swaps?”



Thanks again. I’m really enjoying MoonTower.

Expand full comment
Kris Abdelmessih's avatar

Gotcha...the use of listed derivatives is less concerning since they are market to market in a more transparent consensus mechanism (ETFs are actually themselves derivatives as a are futures) so we are talking about matters of degree.

An example from exerience would be basis risk between GLD and CME gold futures. The first is London deliverable the latter is NYC. Covid made the basis volatile because there was no shipping.

So if you owned some ETF exposed to gold, the nature of the crisis could affect basis differently and it's something to be aware of. It's pretty hard to forsee all the risks, sometimes things happen and you update with "ok, now I learned THAT can happen". I think people that were short Volkswagon options in 2008 would have been more prepared for the meme squeeze mania. They understood how crazy things can happen because liquidity is chaotic concept

Expand full comment