Stock Market Alert – Exchange Traded Notes and Your Investment Portfolio

 

Long-time listeners know that I have a soapbox that I like to stand on and rant from occasionally. One of my favorite topics to “rant” about is the Exchange Traded Note or ETN market. This market is often confused with the ETF market. Viewers, they are not the same!

I’m Chris Perras, Chief Investment Officer with Oak Harvest Financial Group. And this is our investment team’s mid-week release, when we examine a news item, headline, or story making the rounds from publicly available sources and ask, “Is it News or Noise?” or as in this case? Is it an Emergency Alert Warning?

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The first quarter of 2022 has shown a significant uptick in realized volatility. This should not be unexpected to followers of our material, as we first forecasted this back in early November of 2021 before the year-end Santa Claus rally. With that uptick in realized volatility, many retail investors are now looking at ways to either hedge their portfolio or are looking to trade volatility.

I can lecture you for hours, that neither is a great idea now that we have had a normal 10-12% correction over the past 5 to 8 weeks, But I won’t. We laid this correction out for our 1st half 2022 outlook entitled “Curb your enthusiasm yields to a bull market buy”. Here’s the link to that video released in early December.  https://www.youtube.com/watch?v=Ybk6bjjkILQ

This week, I am here to bring you a special Emergency Alert Warning! First, a refresher course in ETNs or Exchange Trade Notes. Viewers, these are not securities with ownership rights like owning a stock or a bond. These are complex financial credit instruments backed by one of the large banks worldwide. What does this mean? This means that these are instruments that are bank liabilities. You own nothing but a promise from a bank. It the case of the VXX, you own a promise from Barclays bank that they will sell volatility futures in a way to “track” the CBOE volatility index as best they can.

On Monday, March 14th, Barclays decided to suspend the issuance of new shares of this ETN at right around $860mm. In doing so, Barclays took a product that over time, in calm or calming markets, should theoretically head to zero due to the ongoing costly forward rolling costs of put options and said “uncle” no more. In 24 hours, they made it untethered from its options math and real markets and turned it into a playground for the Reddit-based wall street bets forum, causing a massive short squeeze.

Here is the intraday chart of the VXX on Monday.

In less than eight trading hours, this ETN, which is supposed to track volatility, went the other way and rocketed higher from $26 to almost $42, or up 62% as the underlying financial instruments that are supposedly backing it, volatility futures, declined by about 5% at the same time. Look at that chart. Viewers, do you know what this chart pattern looks like to me? It looks like Barclays Bank is giving anyone using this product to trade “volatility,” the big middle finger, and saying, you’re on your own. We made a mistake, and this product we created is utter garbage.

What’s this mean in laymen’s and investors’ terms? It means that if your broker, these products were pushed by major brokerage firms for years, or buddy tells you about some great ETN that can help you hedge this exposure or that? Run the other way. Hang up the phone. Tell them you have to call them back and then ghost them on this topic. In my experience, the only ones making money on these WMD’s are the brokerage firms sitting behind them with their math wizards and spreadsheets.

Viewers, feel free to give us a call here to speak to one of our advisors.  Let us help you craft a financial plan that meets your retirement goals and needs first, and your greed’s second. Call us at (877) 896-0040 we are here to help you on your financial journey into and throughout your retirement years.

I’m Chris Perras and Have a great week!

News or Noise: Neither! Emergency Alert Warning

Disclaimer: This content contains general information and express the views of Oak Harvest Investment Services. All data, articles, and information cited are believed to be reliable at the time of creation; however, Oak Harvest does not warrant any information contained herein to be correct, complete, accurate or timely.

Oak Harvest provides links to content produced by other websites that OHFG does not control, and Oak Harvest does not necessarily approve or endorse such content and does not guarantee its accuracy. Nothing in this content constitutes personalized investment advice. Any charts, indicators, or graphs included or referenced in this content have limitations, and no such material is able, in and of itself, to provide a buy or sell recommendation for any security. Strategies and ideas discussed may not be right for you, and views and opinions expressed may change without notice. Strategies and ideas discussed will not apply to all client accounts or portfolios.

Nothing in this content constitutes a recommendation, or an offer or solicitation to buy or sell securities. Oak Harvest makes no assurance as to the accuracy of any forecast or projection made. Not all past forecasts or projections were, nor future forecasts and projections may be, as accurate as any forecasts discussed. Indexes like the S&P 500 are not available for direct investment and your results may differ. Past performance is not indicative of future results. Investing involves the risk of loss.