Are there any exchange-traded notes with tightly inversely correlated performance?

Are there any exchange-traded notes with tightly inversely correlated performance?
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#1

I’m imagining a scenario like this:

FWFunds, LLC maintains ten different exchange-traded funds with ticker symbols FWFA, FWFB, … FWFJ.

These funds track the value of some commodity and help investors mitigate the risk of their other investments in that commodity. Their typical return is very high variance: based on the price of that commodity, after a year, a $100 investment may end up being worth about $1 or about $950!

As it happens, the way the ETNs are written, each of the ten funds covers different possible scenarios, and it’s certain that exactly one $100 investment will end up at the $950 price point while all the rest will end up at $1 after a year.

A savvy investor puts $5000 into each of these funds. At the end of the year, they characterize one of their investments as a Roth IRA; the rest they characterize as normal taxable investments. This investor has spent $50000 and has ended up with $47950 in Roth IRA funds. They took a real risk (that this ETN would remain solvent and that their money would be better off in this place vs. the S&P 500, bonds, or CDs for a year).

Other investors who love variance for different reasons end up buying only one of the funds, but this still doesn’t bankrupt FWFunds LLC because the money really is invested in high-risk outcomes and they aren’t “losing” anything by publishing any one of the funds.

Does this already exist? Could it?


#2

I recall an old FW post relating this to football brackets, but it’s been expanded on in various places. Not only does it allow you to get more into tax advantaged accounts should it be a bull year, but if instead you take a significant loss you can tax harvest them after undoing the contribution.

You probably want some type of leveraged ETF to do this

https://www.bogleheads.org/wiki/Inverse_and_leveraged_ETFs

but it should be noted most of these are daily targets and the variance long term is huge, add on increased management fees and you can be in a position where your accepting extra risk without any additional reward.

Right now the most leveraged ETF’s you can get are triple leveraged, for instance if you want to do this with gold, you can open two separate IRA’s holding JNUG and NUGT, (again don’t expect to come out perfectly at zero with these) and do an IRA excess removal of the loser.

4X ETF’s are around the corner though.

https://www.ft.com/content/a5af4864-3053-11e7-9555-23ef563ecf9a

Personally I’ve looked into this a bit and I’m hesitant, because there’s no funds that offer leveraged options over a long term time frame.


#3

The time period of 12-16 months for the Roth IRA conversion / undo is a bit too long of a time period for holding leveraged ETFs. There is the risk of leveraged and inverse leveraged funds losing value in sideways and volatile daily price changes.

A simple vehicle for the OP might just be long dated calls and puts. For a very directional bet, going out of the money is also effectively leveraging up for a big win or big loss.


#4

You can recharacterize a Roth IRA conversion for 2017, but starting 2018 the new tax reform laws have done away with this option.

https://www.forbes.com/sites/jamiehopkins/2018/01/04/tax-reform-changes-to-recharacterizations-and-roth-ira-2018-contribution-limits/#4ac1abc7309a


#5

What about regular IRA contribution limits?


#6

Those can still be recharacterized, but honestly in today’s low volatility environment, if your goal is to increase your Roth retirement funds you’d be better served looking into Solo 401ks and after-tax (nondeductible) contributions than screwing around at the margin for a small fraction of a $5k annual contribution via one of these approaches.

Having helped someone with an IRA recharacterizations previously, the calculation of how many earnings need to be moved back and the tax reporting from your 1099Rs and on Form 8606 is more than enough to deter me from doing this for small sums. It’s not hard, but it still takes some doing. The value of your time may be different.