Carry Trade ETF

[Jeff W]

DBV

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Description
Seeks to track the Deutsche Bank G10 Currency Future Harvest Index™ by (1) entering into long futures contracts on the three G10 currencies associated with the highest interest rates, (2) entering into short futures contracts on the three G10 currencies associated with the lowest interest rates, and (3) collateralizing the futures contracts with United States 3-month Treasury bills.

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Any thoughts on the strategy? Because of low correlation with other asset classes, DBV could be a highly useful portfolio addition if it has a real return. I am skeptical that this strategy will yield positive returns at all--the strategy is a bet against interest rate parity.

[DcifrThs]

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DBV

[ QUOTE ]
Description
Seeks to track the Deutsche Bank G10 Currency Future Harvest Index™ by (1) entering into long futures contracts on the three G10 currencies associated with the highest interest rates, (2) entering into short futures contracts on the three G10 currencies associated with the lowest interest rates, and (3) collateralizing the futures contracts with United States 3-month Treasury bills.

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Any thoughts on the strategy? Because of low correlation with other asset classes, DBV could be a highly useful portfolio addition if it has a real return. I am skeptical that this strategy will yield positive returns at all--the strategy is a bet against interest rate parity.

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they (the creators of the product) have created a product that is in demand...rightly or wrongly. they make money win or lose.

the payoff profile of a carry trade (to the investor & not to the creator of the product) is win win win win win win LOOOOOOOOOSSSSSSSSEEEEEEE. they are more likely to win than lose.

so they are basically:

long US, long AUD, long EUR (unless NZD is in the G10)
short JPN, short the other 2 lowest yields (not sure about all these).

as long as currencies stay lowly volatile this will make money.

one thing i dont get so much is the actual yield they get. seems like they own US 3 mo Tbills and not the actual EUR & AUD bills. so the futures contracts don't yield any actual coupons from investing and they just get the payoffs on teh futures contracts.

so for this to make money the carry trade has to get stronger (draw futures money into high yielding and have future money leaving low yielding) than what it is now. given the low vol in the spot currency markets that is feasible.

in reality though, you are adding a 0 EV (or negative EV) volatile bet to yoru portfolio.

this would have to be strongly negatively correlated to be worth adding (which it won't be). if it is actually negative EV (as in you hold during the times the carry trade falls about), i'm not sure if a -1 corr. would make it worthwhile (depends how -ev but not sure about how bad it would have to be).

let me know if i've missed something.
Barron

[Jeff W]

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they (the creators of the product) have created a product that is in demand...rightly or wrongly. they make money win or lose.

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It is definitely a brilliant product idea.

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in reality though, you are adding a 0 EV (or negative EV) volatile bet to yoru portfolio.

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I tend to think so as well, but it is not a settled question AFAIK. The problem is that the ETF has to overcome the .81% expenses as well.

[NajdorfDefense]

I think it's a 0ev bet unless you can forecast rates better than the market.

[DcifrThs]

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I think it's a 0ev bet unless you can forecast rates better than the market.

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well of course, but we're talking passive here i think (or at least thats the impression i got). just holding the ETF can't be pluuuuus eeee veeeee lol.

and yea, i forgot about fees. 81bps + all other considerations = just too much to overcome. no way this should be added as a passive portfolio.

now as najdor said, if you have a position, this is a fairly easy way to take it...but then again, if you're sophisticated enough to be able to take a position on that, then you'll probably want to do it yourself for less cost as this is one of the not-so-complex things to execute.

Barron

[Jeff W]

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just holding the ETF can't be pluuuuus eeee veeeee lol.

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The idea behind the ETF is that it is a +EV long term holding based on the forward premium anomaly:

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Empirical evidence shows that currencies that are at a forward premium and that, correspondingly, have a low interest rate, actually tend, on average, to depreciate, not appreciate, as the theory of interest parity conditions predicts. Similarly, currencies that are at a forward discount and that, correspondingly, have a high interest rate, tend, on average, to appreciate, not depreciate. This anomaly, then, implies that an investor who enters a carry trade is quite likely to make predictable profits from two sources: the interest rate differential between two currencies and the appreciation of the high-interest-rate currency that was originally bought at a forward discount.

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Link

Bull [censored] statistical artifact? Maybe--I sure don't know the answer. I'm certainly not going to invest in this ETF, but I thought it would be worth discussing.

[DcifrThs]

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[ QUOTE ]
just holding the ETF can't be pluuuuus eeee veeeee lol.

[/ QUOTE ]

The idea behind the ETF is that it is a +EV long term holding based on the forward premium anomaly:

[ QUOTE ]
Empirical evidence shows that currencies that are at a forward premium and that, correspondingly, have a low interest rate, actually tend, on average, to depreciate, not appreciate, as the theory of interest parity conditions predicts. Similarly, currencies that are at a forward discount and that, correspondingly, have a high interest rate, tend, on average, to appreciate, not depreciate. This anomaly, then, implies that an investor who enters a carry trade is quite likely to make predictable profits from two sources: the interest rate differential between two currencies and the appreciation of the high-interest-rate currency that was originally bought at a forward discount.

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Link

Bull [censored] statistical artifact? Maybe--I sure don't know the answer. I'm certainly not going to invest in this ETF, but I thought it would be worth discussing.

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yea thats the exact kind of strategy i wouldn't touch with a 10 ft pole.

historically, parody has been a very poor trading strategy. they are taking a one sided view on the market and holding it. i'm super skeptical about the efficacy of this fund. great for the bank. bad for investors.

and im sure i'll regret asking, but i'm curious to see the study (ies) that lead to this fund.

Barron