The ETF angle for medium term trading

I see a ton of interest in ETFs lately and specifically oil related ETFs, Horizons BetaPro NYMEX Crude Oil Bull and Bear Plus ETFs, HOU and HOD respectively. The particular ETF or index has not really interested me unless they are in a certain price range, have ample intraday volatility, enough liquidity and have an index that I can track in real time...this all for day trading purposes. So in this regard I really don't care too much which one I am using.

Having said that this particular interest caught my attention and leads me to check into ETFs a little closer.

Link to my post about ETFs from my daytrading blog.

Another link with more particulars and other links to Horizons BetaPro ETFs.

I took a table from the Horizons site, exported it into a spreadsheet and ran a few numbers to get a feel for how the ETFs seem to behave. I figured out some ratios to see a few relationships. Now these may not mean much as a single day snapshot so I may have to track them for a bit but they are interesting none the less.

RELATIVE VOLUME (Relative to the outstanding shares)

To get an idea of the interest in a particular fund I divide the volume for the day by the outstanding shares. I figure that the closer to 1 this number is the higher the trading interest, this is relevant more to compare the bear vs the bull of the same ETF than comparing anything between the various ETFs, although higher interest ratios can lead to at least better liquidity. Interestingly the bear crude oil ETF, HOD, was ahead as it traded more than the number of shares in circulation by a ratio of 1.57:1.

Top five in relative volume:

1.57 - Crude Oil Bear (HOD)
0.48 - Natural Gas Bear (HND)
0.43 - Crude Oil Bull (HOU)
0.31 - Global Gold Bear (HGD)
0.18 - S&P 500 series Bear (HSD)

I'm not sure if this really means anything but the rankings were interesting to note.

PERCENTAGE CHANGE CORRELATION

This shows that the inverse funds track well together...when one goes up the other goes down a corresponding percentage. I think that this is a very important factor in trading these funds as a bear that wildly varies in the inverse relationship from the bull creates an unpredictable result when trying to trade them based on the index that they are supposed to be following...they cannot be tracking well and with less correlation, the worse they are at that.

I used the percentage price change of the last day between the bear and bull of the same fund. I divide the increase of one by the decrease of the other then also calculate the decrease by the increase. If they are tracking well I would expect both numbers to be close to 1. They were not all, so to make the results easier to see quickly I just use the difference between the two calculations. The closer to zero this number is the closer the overall correlation.

The top five in percentage change correlation:

0.02 - TSX 60 series (HXU/HXD)
0.07 - Global Gold (HGU/HGD)
0.08 - S&P 500 series (HSU/HSD)
0.13 - Financial series (HFU/HFD)
0.29 - Crude Oil (HOU/HOD)

MEAN VARIANCE

The last number that I noted was the Mean Variance or how far away from the mean of the two funds, bear and bull, the current prices were as a percentage of the mean. This sort of falls into the category of Reversion to the Mean as a method of determining the probability of a trade.

I think, but have not thought long on this, that the mean might represent the underlying index if it were represented as a number relating to the two derivative funds and charted over time. In theory I would expect that the funds would track equally on either side of this number...but they won't in practise I am sure. So it may serve as a snapshot indication of the current state of the price only. I would like to see a large variance to consider a larger likely price change to return to the mean...which should happen at some point.

The top five in wide mean variance:

88% - Natural Gas (HNU/HND)
80% - Financials (HFU/HFD)
76% - Crude Oil (HOU/HOD)
70% - S&P 500 (HSU/HSD)
69% - NASDAQ 100 (HQU/HQD)

So, after playing with these numbers it is interesting to see who has the best showing in the top five lists, I suppose that I could have easily guessed this answer without doing any of these calculations. Having said that, it suggests that perhaps my spreadsheet may be useful in the future when it is not quite so "cut and dried".

Crude Oil. Both the bear and bull funds made the high relative volume list and placed in the change correlation and wide mean variance lists as well.

I was surprised to see the S&P 500 show on all three lists as well. I think I may have a closer look at these fund offerings to see if they match my other normal criteria.

Do note that these are not recommendations for trading any of these funds even though I will probably check them out closer and perhaps even do some trading on them myself...afterall, that is the only real way to prove an idea one way or the other.

Jeff.