On popular cooking shows, contestants use state-of-the-art equipment to create intricately complex cuisine. Yet most cooks have little everyday use for an immersion circulator or an Anti-Griddle.
We should think the same way when it comes to investment products.
A pair of new exchange-traded notes, while innovative, will likely be of little use to even the most aggressive and curious investors. Launched by UBS, the ETRACS Fisher-Gartman Risk On ETN (ONN)
As markets have become more dominated by government intervention in recent years, correlations among asset classes have increased, leading to entire days or weeks of "risk on" or "risk off" trading. When stocks rise, they all rise, along with high yield bonds, commodities, foreign currency and most other risk assets.
The notes track an index which combines a 150% long position in stocks, commodities and currencies with a 50% short position in "safe-haven" assets such as government bonds, the Swiss Franc and the Japanese Yen. When risk assets rise, so should ONN. OFF provides the mirror image, rising when risk assets fall and "safe" assets like treasuries gain. Both carry an annual expense ratio of around 1% a year.
It Slices, It Dices
The Fisher-Gartman Risk Index Allocation, December 2011
|Exposure||Long - 150%||Short - 50%|
While I've often championed using ETFs and ETNs to access alternative asset classes like commodities or foreign exchange, this most recent incarnation will likely find a finite audience, especially if historical correlations retreat from recent historic highs. Unlike leveraged loan funds or baskets of shipping stocks, "risk" itself is a rather amorphous asset whose definition changes over time. In 1999, large-cap technology stocks were the most dominant "risk" asset. A decade later, it was gold.
While the notes' holdings will be updated quarterly, the current environment of high correlations among risk assets is an historical anachronism. In more normal markets, it's not simply "risk" you want to assume or shed, but the right risks at the right time. The notes offer an inelegant solution to a problem that isn't likely to persist for very long.
Still, one must admire the creativity of the financial minds who continue to dream up such innovations, which package previously unavailable strategies into trades any investor can exploit. The "Risk On" and "Risk Off" ETNs are novel breakthroughs when it comes to financial engineering. While they could find an audience with sophisticated hedgers or options traders, their utility to the everyday investor will remain limited at best.—Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC