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The Loch Ness Monster. Sightings of the legendary creature date back to 565 A.D., but the most famous is from the 1934 Surgeon’s Photo. Some believe. We’re skeptics. It’s hard to feel certain about much these days. But when it comes to markets, Russell provides certainty, in the form of precise, market-cap, style and risk-factor indexes. No committees. No gaps. Just pure objectivity. Because your portfolio depends on it. FOR AN HONEST VIEW, CALL 866-787-4380, OR VISIT, russell.com/truth CORP-7481 GLOBAL EQUITY • US EQUITY • STABILITY • THEMATIC • STRATEGY • ALTERNATIVE BETA
Relative Value Trading In lower-correlation environments, there is differentiation in performance across and within asset classes exists. Given the breadth of the ETF and ETF options market, investors can take a view on the spread between two assets—at the sector, country or cross-asset level. For example, using sector ETFs, investors can trade a single stock against a basket of its peers (same sector), thus allowing one to isolate the fundamentals of a particular company in a relative value trade. Or investors can trade the outperformance between two equity sectors. Likewise, with country-specific ETFs, investors can play an outperformance between regions. Even further, ETFs allow for views across assets to play the relative value between any Figure 15 Hypothetical Expiry P&L Of Short Iron Condor Strategy On GLD 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% -20% -15% -10% -5% 0% 5% 10% 15% 20% Source: BofA Merrill Lynch Global Research Figure 16 Backtesting Results For Systematic 4-Week Iron Condors On Global Equity Indexes (From Jan. 1, 2002-Sept. 7, 2012) S&P 500 Iron Condor ESTX50 Iron Condor NKY Iron Condor Bloomberg Ticker MLBWSPAR Index MLFPEEAR Index MLEINKAR Index Annualized return since ‘02 3.8% 5.8% 6.0% Volatility since ‘02 8.3% 8.5% 8.0% Information ratio since ‘02 0.46 0.68 0.75 Source: BofA Merrill Lynch Global Research Note: Backtesting is hypothetical in nature and reflects application of the trade strategy prior to its introduction. Figure 17 120 115 110 105 100 95 90 85 80 75 70 Jun. ’08 GLD Iron Condor Strategy Vs. HFRI Fund-Weighted Composite Oct. Feb. Jun. Oct. Feb. Jun. Oct. Feb. Jun. Oct. Feb. ’08 ’09 ’09 ’09 ’10 ’10 ’10 ’11 ’11 ’11 ’12 ■ GLD Iron Condor Source: BofA Merrill Lynch Global Research Note: Data covers June 2008 - Sept. 2012. A 1-month 88/96 106/114 short iron condor strategy on GLD since June 2008 provides a risk-controlled way to capture the richness in GLD options. ■ HFRI Fund Weighted Composite pair of equity, commodity, fixed-income or currency assets. A simple way to implement a long/short relative value trade is by going long and short the respective assets. However, the losses of an outright long/short trade can be uncapped if the assets move in the opposite direction Jun. ’12 of what was anticipated. Alternatively, a long-call-option/ short-call-spread-option pair also implements a long/short relative value view, but with capped downside. Example 7: Long Cyclical Sectors, Short Defensive In Reflationary Environments Historically, cyclical stocks strongly outperform defensive stocks in reflationary environments. To express this in the U.S., an investor could go long NYSE Arca: XLY (discretionary sector ETF) and short NYSE Arca: XLI (industrials sector ETF). However, this trade has uncapped losses in the amount that XLI potentially outperforms XLY. To help mitigate the risk of the relative value trade, an investor alternatively could purchase call options on XLY and sell a call spread on XLI. This long-call-option/short-call-spread-option pair trade has limited loss, as the long-call option’s maximum downside is the upfront premium, while the short call spread’s losses are capped to the distance between the two call-option strikes. If indeed XLY outperforms XLI, the long-call option would be better than the short-call spread, allowing an investor to capitalize on the relative outperformance but with limited downside risk. Endnotes 1 The S&P 500 Index options market is the largest in the world in terms of notional volume. 2 For a definition of the S&P Global Industry Classification Standard (GICS), please see: http://www.standardandpoors.com/indices/gics/en/us 3 Select Sector SPDRs are ETFs that divide the S&P 500 into nine sectors. Together, the nine Select Sector SPDRs represent the S&P 500 as a whole. 4 Each month this strategy sells a put that is 4 percent out-of-the-money and a call that is 6 percent out of-the-money and then buys back a put that is 12 percent out-of-themoney and a call 14 percent out-of-the-money. All options are held to expiry and the trade is reinitiated each month. Printed by permission. Copyright © 2012 Bank of America Corporation. Further reproduction or distribution is strictly prohibited. 18 November / December 2012
Page 1 and 2: Plus Blitzer on the history of opti
Page 3: Contributors Mark Abssy Mark Abssy
Page 6 and 7: STOXX LIMITED INNOVATIVE INDEXING.
Page 8 and 9: People’s futures are in your hand
Page 10 and 11: ©2012 Morningstar, Inc. All rights
Page 12 and 13: Exchange-traded products span a wid
Page 14 and 15: Figure 5 Median notional Volume ($B
Page 16 and 17: the put spread in this example is $
Page 20 and 21: TAKE A NEW LINE WITH YOUR EQUITY Po
Page 22 and 23: Over the past 12 years, U.S. invest
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Page 34 and 35: THE POWERSHARES DB COMMODITY INDEX
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Page 40 and 41: Alternative Investments 4.0% Real E
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Page 46 and 47: Figure 1 sectors No. of top dogs Re
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Page 50 and 51: States, the average concentration p
Page 52 and 53: Figure 10 sectors Source: Research
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Page 58 and 59: open the Etracs Long-Short S&P 500
Page 60 and 61: Morningstar Index Funds U.S. Style
Page 62 and 63: Exchange-Traded Dow Jones U.S. Indu
Page 64 and 65: ETF Analytics Your clients want mor
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©2012, THE NASDAQ OMX GROUP, INC.
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