INTERVIEW: Factor Advisors Seeks To Make Spread Trading Easier, More Efficient
(Kitco News) - Spread trading is a popular way for investors to capture changes in price between two different products, but it can be a costly and sometimes inefficient way to trade.
In a spread trade an investor usually will buy one commodity and sell another simultaneously, looking for the price difference (or spread) to move in a desired manner.
For instance, an investor might buy corn and sell soybeans, or buy gold and sell platinum. Futures traders can also put on spread trades within a commodity, like buying the nearby gold future and selling the deferred contract.
But to do that involves making two separate trades, which means incurring costs for both sides of the trade. In addition timing can go awry since the traders have to be entered individually, something known as “leg risk.”
A new set of exchange-traded funds seeks to reduce the costs of doing these trades and eliminate the leg risk. Factor Advisors has introduced five ETFs that allow spread trading between set markets. The funds allow investors to hold a bullish and bearish position in one leveraged ETF. The funds are: S&P500 Bull/T-bond Bear (FSE), T-bond Bull/S&P500 Bear (FSA), S&P500 Bull/US dollar Bear (FSU), Oil Bull/S&P 500 Bear (FOL), Gold Bull/S&P500 Bear (FSG). They trade on the NYSE Arca and launched Feb. 24.
The funds rebalance daily to keep a dollar neutrality and target a daily leverage ratio of 4:1, where each dollar invested provides approximately two dollars of long futures exposure and two dollars of short futures exposures after rebalancing.
The approach comes from the research done by Richard Roll of UCLA’s Anderson School of Management, who studied risk factor-based investing. Roll is head of research at Factor Advisors, and investment banker Karlheinz Muhr is chairman.
Factor Advisors is the parent company of New York-based Factor Capital Management, which is registered as a commodity pool operator with the Commodity Futures Trading Commission and is a member of the National Futures Association.
Stuart Rosenthal, chief executive officer of Factor Advisors, said these ETFs make spread trading much cheaper by eliminating the double transaction fees and double margin requirements. The management fee for the ETF is 0.75%.
The oil and the gold ETF are also negatively correlated to the S&P, which can help with portfolio diversification and allow alternative investing.
Rosenthal also cautioned these new ETFs are for sophisticated traders. “We’re very clear about who is the intended audience,” he told Kitco News, which include seasoned traders and institutional firms.
The ETFs are just about two months old and so far have about $25 million under management. Rosenthal said it’s still a bit too soon to say what type of investor has bought these vehicles.
Because these ETFs are the first of their kind, Rosenthal said he knows the firm has a lot of education to do explaining spread-based trading to a broader investing landscape. He equates it to how commodity trading has evolved.
“Ten years ago no one saw commodities as an asset class, but commodities were traded in Chicago and New York for a long time. It was never tracked closely. Now it is. It’s the same with factor trading. It’s not going to happen overnight, but we’re aware of the task ahead,” he said.
By Debbie Carlson of Kitco News dcarlson@kitco.com
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