Saturday, October 8, 2016

Is Twitter becoming the Netflix of Live Content?

The best businesses to invest in are the ones that are hard at work solving big problems.  I'll admit, it's been getting harder and harder lately for me to see the problem that Twitter $TWTR is working to solve.  After watching a bit of Twitter's Thursday Night Football broadcast between the 49ers and the Cardinals the other night, I think I'm finally starting to get it.

If Facebook $FB solves the problem of connecting distant acquaintances then Twitter solves the problem of connecting people that are involved in a live moment together.  That moment could be a sporting event, rock concert, an awards ceremony or something tragic or even revolutionary.  In the words of CEO Jack Dorsey...Twitter is live...Twitter is real-time.  Twitter will be more and more successful the more it can explore this idea of capturing live moments.  I see progress manifesting itself in the form of more live content from places like Burning Man, SXSW, the US Open and Tour de France.  Advertising will have to adapt to a platform like Twitter that provides a capability that has never existed before...the ability to plug into what is happening at this very moment.

If you've ever considered cord cutting like I have, the one thing that might be holding you back is the loss of live television.  Binge watching can be fun but it can leave you feeling disconnected from what is going on right now.  I think the next level for Twitter is to become the Netflix of live broadcasts.  At that point there would be nothing to stop a cord cutter from getting the same experience from a combination of Netflix $NFLX and Twitter as they get from their current old fashioned cable company less the outrageous fees of course.

Lets take a look at some numbers.  Disney's ESPN network is estimated to be worth $39B of Disney's total $149B market cap and currently charges more that $7 a month per subscriber.  If Twitter could make a serious move into covering more "fringe-worthy" sporting events as well as other live events such as music festivals then Twitter's current $14B market cap may actually start to look cheap.  Even though that is a big "IF" I think Twitter is currently the best positioned company to step into the role of streaming live events.  It would integrate into a single platform a way for celebrities to promote and distribute their content while engaging their user base in real time.  A platform like this could become a serious contender to Google's YouTube worth $87B and maybe even what Apple TV worth $3B was always meant to be.

My humble advice to Jack Dorsey would be to create something called "Twitter Now", charge something like $7.99 a month for it and start making some serious money for investors.  If Google $GOOG, Apple $AAPL, Disney $DIS and Salesforce $CRM are not interested now they certainly should and soon will be.

Friday, September 9, 2016

Brexit is just the Beginning

Now that the reality of Brexit has settled in many people are probably wondering what to expect next.  The key to understanding what comes next can be found in the reasons that made Brexit possible in the first place.  To me, the core of the issue revolves around globalization and income inequality.

Armed with the latest technology corporations are able to globalize their businesses faster than ever which means taking advantage of lower cost operations anywhere in the world.  Most people are not ready to keep up with the ever increasing pace of global focus shifts.  Most of us go to school to learn one particular skill and are not able to shift our skills rapidly in mid career at the turn of a dime.  This however, is what the modern corporation expects from us...constant evolution.  This is also what workers across the world are just now beginning to lash back against with a new anti-globalist movement that made Brexit possible.

When looking only at the shallow surface of globalization there are obvious benefits.  Lower costs of operations for corporations means lower priced goods to buy which should theoretically balance out any losses in incomes.  Driving those lower costs into higher rates of production creates more equity or wealth which normally would be a great benefit.  One of the deeper issues with this ideal is that workers don't typically own or seek to own a significant portion of equity in business and thus do not benefit from the increases in wealth that globalization provides.  They do suffer however when corporations abruptly cast them aside for a cheaper way of doing business.  This is what I believe is at the root of the growing income inequality epidemic.  Workers are not owners of globalization and thus are becoming rapidly less equal in terms of wealth as globalization accelerates.

In a sense, it is the fault of both sides.  Workers should seek to own more equity in business by investing more of their monthly payment into a low cost index fund of large multinational corporations such as $SPY or $EFA.  On the other side businesses should be sensitive to the long term ramifications of getting too comfortable with throwing workers away.  In the long run globalization is inevitable as losing economies will always seek to emulate winning economies and will always be ready and willing to provide their lower costs of labor to the globalist initiative.

I once went to a leadership seminar where we played a game that taught us about long term versus short term decision making.  We were broken into groups and given certain cards.  The rules were set up in such a way that if every group played one type of card every group would get a small amount of money.  If however, one group played a different card it would get all of the money while the other groups would sustain losses.  I watched this game played many times and there was always one group that would take advantage to the bewilderment of the other groups.  The point of this exercise was to show that short term business decisions focused only on profits come at the expense of long term business relationships.  This is exactly where we are at this moment in time.  Corporations need to understand that the short term profits that come from globalist type strategies come at the expense of the long term relationship they have with workers.

I wouldn't contend that corporations should avoid globalization altogether as this may result in unnecessary bankruptcies but rather keep in mind the long term and give your workers a fair shot in benefiting from globalization as well.  This fair shot could take the form of retraining programs, education about how to invest or restructuring compensation to include larger portions of equity based payment.  It is clear to me that in this upcoming election Trump represents the anti-globalist movement while Clinton represents the status quo and continuation of globalist ideals.  If corporations would like to continue with their globalist strategies I would seriously contemplate how an unlikely candidate such as Trump has come to power and the extreme environment that has led to this November showdown.

Saturday, August 27, 2016

Hillary vs Biotech

Hillary Clinton's campaign rhetoric has been wreaking havoc in the Biotechnology sector ever since she started speaking out against drug prices last year.  I agree that drug prices are way too high but so are a lot of other things like the cost of housing and food in general.  She has tried to paint Biotech companies as sinister organizations focused only on profit but I believe that characterization is far from the truth or misleading at best.

Biotech companies just like any other companies are only trying to survive from one year to the next.  If you've ever been a Biotech investor you know that it is not all rainbows and sunshine year over year.  Biotechnology is a brutal business where bankruptcies are not uncommon and profits are far from certain.  So when a company in this industry comes out with a drug that is profitable they need to make the most out of it because the next big failure is just around the corner.

If we are trying to be fair let's also lay some of the blame on regulators for creating a patent law structure and FDA approval process that turns the whole process of creating life saving medicine into some kind of Biotech hunger games.  There is nothing more expensive than hiring medical geniuses to invent miracles so it is not surprising to me how high drug prices have gotten.  Just as with any free functioning market the price will find itself somewhere in between supply and demand in the long run.  So if a company can raise the price of its product and still experience demand for that product the price is justified from a free market perspective.
 
History has shown us that when politics step in and interfere with the pricing mechanisms of the market that interference only tends to make things even more expensive.  If the government really wants less expensive drugs maybe it should spend more of its budget buying drugs at market prices and then selling them at below market prices.  Or, similar to what is done in the defense industry, it could front more of the research and development costs that these companies face thereby lowering their burden of profit.

So from an investing perspective...is there a way to make any money out of this mess?

My opinion is that this setback in Biotech is only temporary and will eventually work itself out over the next several years as the true value of these drugs prevail.  I like to express my perspective as an investment in the Biotechnology index rather than any individual company because the failure risk of a single company in this particular sector is way too high for my tastes.  Currently the largest Biotech related ETFs $XBI and $IBB are approximately 30% off of their highs reached last year which means that a profit of +40% could be had if the Biotech sector were to recover over the next several years.
 
Even better, a leveraged version of these ETFs $LABU is off a whopping 84% from its high which would mean a +500% return if the Biotech sector were to recover.  Sure there is volatility based lag embedded in any leveraged investment but if the Biotech sector were to recover to and exceed its highs the leveraged fund would not be very far behind.  Think of the leverage in these terms...if I invest $100 today and the entire Biotech industry goes bankrupt and never recovers then I lose my hundred bucks.  If the Biotech industry does recover someday I'll turn my hundred bucks into $600...nuff said.

This same strategy could also be used in the even broader Heathcare index by using $XLV and $CURE respectively.  The fact that the entire Healthcare industry has been hit this hard by political rhetoric when the demand for high quality heathcare has never been higher is in my opinion a screaming buy.  Remember, as always, don't over do it, stay diversified and think long term.

Finally, I would encourage the Clinton campaign to work with the Biotechnology industry instead of against it because the blame of high drug prices really belongs on both sides of the table and there are also some very amazing people that do amazing work in this industry that do not deserve to be painted with such broad brush.

Read Next: Is it Amazon or Amazing?

Friday, May 13, 2016

Is it Amazon or Amazing?

I have been so impressed with my investment in Amazon lately that I pulled out an old book interview with David Shaw to reread the part where he discusses hiring Jeff Bezos.  If you aren't aware of what D. E. Shaw & Co. is then all you need to know is that they are pretty much some of the smartest investors on the planet and basically invented the concept of high frequency trading.

It is not hard to see in hindsight why Shaw saw so much potential in Bezos when he first hired him because they basically have very similar views on how to achieve success.  It is clear to me now that Bezos just like Shaw was very interested in using technology, speed and volume to benefit from massive economies of scale that would drive competitors to either emulate them or be forced out of business.

Amazon is known for being a retail juggernaut but I think Amazon's real secret is their desire to leverage technology to bring massive economies of scale to every market that they can get their hands on.  Whether it be shipping, television or cloud computing the result is always the same...drive out competitors by offering superior pricing power.  The success that they have achieved with this business model is undeniable and is attracting very high profile partnerships with amazing companies in their own rights such as Salesforce and Netflix.

Why is Amazon so successful?

The answer to this question for me is simple.  This undaunting success of Amazon is so characteristic of companies led by visionary founders such as Steve Jobs with Apple or Elon Musk with Tesla.  The desire and hunger to navigate the financial equivalent of deep ocean tempests and come out on the other end wiser and stronger is something only a founder is willing or able to do.  I see Amazon continuing to achieve great success so long as Bezos is at the helm.

Is it too late to get involved?

Based on my own past experiences I would not be adding to my investment in Amazon here at all time highs.  The nature of the technology business is fickle and the crowd that has quickly rushed in to enjoy Amazon's success will just as quickly rush out at the slightest hint of failure.  There is a difference between investing in a great company and being able to profit from that investment.  Remember, when it comes to investing, patience, patience, patience.

Saturday, April 23, 2016

The Ideal ETF Portfolio


Here is what I would consider an ideal portfolio:

12.5% SPY - Large Cap
12.5% EFA - International Value
12.5% EEM - International Growth
6.25% IWM - Small Cap
6.25% QQQ - Technology

25% USD - US Dollars
6.25% AGG - US Bonds
6.25% EMB - International High Yield
6.25% BNDX - International Bonds
6.25% HYG - High Yield

This is only what I would consider a theoretical target for a retirement aged investor under normal circumstances but as everybody knows the market frequently operates under conditions that may be described as anything but normal.  I also suffer from the same mistakes that many investors suffer from such as reacting on emotion or bad analysis.  As time passes however, I intend to learn from my mistakes and aim to rebalance my own real portfolio in this direction but only ever plan to reach perfect balance as often as a tight rope walker does at the circus.  

Why not just rebalance immediately after getting out of balance?

I think that it is important to give investments room to breathe which means not always changing them in the way you would rip off a bandage.  Whether an investment is working out well or going badly it is important to recognize that the timing of profits are anything but predictable and the more time that you give to an investment the greater chance that it has to grow properly.  Instead of being quick to cut investments that are not working consider investing in smaller portions over longer periods of time to help reduce bad timing risks.

Why such a large allocation to cash?

Cash is like the king on a chessboard...it has very little functionality on its own but the game cannot be played without it.  In my own experiences I have noticed that the market frequently punishes certain companies and even whole sectors for various reasons only to eventually forget about those reasons over time leading to a recovery.  Keeping cash is like an insurance policy that allows you to take advantage of these special situations when they arise providing a nice risk adjusted return that I think rivals the safest of investments, even treasuries.  Many investors consider an investment falling in price an indicator of increased risk...I tend to think the opposite especially if there is no material change in the fundamental characteristics of the investment itself.

Why such a small allocation to the S&P?

I don't know why so many investors consider the S&P the only game in town.  I've heard plenty of arguments such as the perpetual strength of the US or the multinational orientation of many of its companies but based on what I've learned over the past decade about investing...there is no such thing as tenure or incumbency advantage when it comes to markets.  In the absence of sound information, which is probably 90% of the time, I must weight assets and opportunities equally.  Maintaining a diversified portfolio is just as much about staying power as it is about holding different types of assets.  You need to be able to survive your mistakes in order to learn from them.  This type of thought process has brought me success in the past and I believe will continue to bring me success in the future.  

Is there an ideal portfolio for everybody?

Everything changes and everyone's circumstances are different which could lead to drastic differences in what one would call the ideal portfolio.  Do you have large mortgage or student loan debt or do you work at a place that pays low but has lots of potential?  Diversification doesn't have to stop with your portfolio but can be applied to your whole life as well.  Think about how you can use your unique circumstances to shape and even strengthen your ideal portfolio and you’ll be on your way to discovering who you really are as an investor.  Remember as always, don't over do it, stay diversified and think long term.

Read Next: The BIG Picture

Saturday, April 16, 2016

The BIG Picture

Are we in a stock market bubble?  I think about this question a lot more often nowadays and generally speaking my answer is no.  There are certain things that characterize a bubble for me such as accelerating inflation and interest rates as frenzied borrowers attempt to acquire more money to throw at the bubble.  We actually have the opposite of these two characteristics at the moment which would lead me to believe that we are still in somewhat of a recession. 

To help with maintaining perspective and to avoid overfocusing on near term events I like to keep a long term 60+ year chart of the S&P 500 $SPX handy.  On this chart I also like to plot 7% and 8% annual growth rates because the market has tended to be somewhat constrained by these two rates of growth over the long run.  Looking at the data from this higher level perspective helps to show that the Dot Com Boom was abnormal with the Housing Boom and the subsequent Great Recession within the normal range of long term growth.  Currently we find ourselves smack in the middle of these two rates with the downside limit near 1500 and the upside limit near 2500.  Even though these upper and lower bounds represent normal price movement to me...the majority of the investing public would be ready to declare a depression if the market were to fall 20% or a new era if it were to rise 25%.  This is one of the main benefits in keeping a long term perspective to avoid misinterpreting normal price movement as extreme price movement while relying on too narrow of a focus. 


Furthermore, these bounds would only represent normal price movement but as we all know the market can become abnormal fairly quickly.  With this in mind, I still could not be shocked if the market were to fall all the way to 1000 or rise as far as 4000.  Keeping the BIG picture in mind is so important whether it be prudent investing or anything else in life and to be successful one must practice doing this all of the time.  The more history that you can bring into the picture on not just equity prices but commodity prices as well as interest and exchange rates, the better and more robust your perspective will be.

To recap, with global interest rates and commodity prices near all time lows and the dollar exchange rate and equity prices near all time highs...I just cannot see a bubble at this time.  The absence of a bubble however does not mean that the market cannot still fall substantially so I wouldn't be getting too excited.  Whatever opinion you decide on for yourself remember as always...stay diversified and think long term.

Saturday, April 9, 2016

Is Elon Musk the Steve Jobs of Cars?

I recently purchased additional shares of Tesla $TSLA on 2/9/16 for $142.25 per share and I am shocked and amazed at the more than 75% return that these shares have generated over the past several weeks.  I like Tesla mainly as a growth story but there is something different about this company from other growth companies that I own in my portfolio.

Last Friday during the Model 3 release I saw so many people standing in huge lines all over the country and it reminded me of only one thing...the release of the iPhone.  Never have so many people been so excited about the release of a car and I am starting to think that Musk has discovered something about cars that Jobs had discovered about electronics...what people really want.  When Jobs wanted to put the real internet, not some stripped down version, onto a mobile phone there were many naysayers including the now defunct BlackBerry.  Companies that grow and take market share are companies like Apple that can deliver what people actually want.  I think that Musk and Tesla have stumbled upon this idea as well and are going to start delivering cars that people actually want.

Surprisingly, other auto manufacturers will probably act like BlackBerry did and watch in disbelief as their businesses are taken from them right before their very own eyes.  They will refuse to change their models until it is far too late.  Let's take a look at the potential market share that is up for grabs.


Based on this data, Tesla could double if it can steal as little as 5% of the total outstanding $719B market capitalization of auto manufacturers.  Given the premise that Tesla could push the entire industry to grow and that it could potentially become a strong leader of this newly redesigned industry, 5% could actually be at the lower end of the range.

Musk is similar to Jobs in that they both share a passion for trying different things and fearlessly pushing on boundaries.  It is most likely too early to tell whether or not Musk can use this passion to bring to Telsa the same kind of success that Jobs and Apple have experienced.  That being said, I think Tesla is a great addition to any growth oriented portfolio.  Before getting too excited about the prospects of Tesla you should be aware of the following risks which are surprisingly similar to my favorite ride at Six Flags:

"WARNING: This is a high speed investment that includes sudden and dramatic acceleration, climbing, tilting and dropping.  Failure to follow these guidelines may result in serious loss of capital or bankruptcy.  Investors with the following conditions should not invest: Heart conditions or abnormal blood pressure, back, neck or similar physical conditions, motion sickness or dizziness, recent surgery or other conditions that may be aggravated by this investment."

Remember as always...don't over do it, stay diversified and think long term.

Friday, April 8, 2016

Is Oil at Rock Bottom?

You've probably heard by now the bullish and bearish cases each with compelling arguments in their own rights.  Regardless of the details on storage capacity and dollar strengthening the simple truth about oil's surprisingly low price is that a new technology called "fracking" has been invented and it has pulled more oil out of the earth than anyone could have imagined.  It is nearly impossible to value oil right now due to the disruption that has been caused by this new technology.

Despite all of the issues with the energy sector right now I tend to find myself in the bullish camp based on the simple fact that it has been priced for destruction meaning the risk reward ratio is undoubtedly skewed towards reward.  Here are a few other factors that I am leaning on to help me with this decision:

1. Many world economies are dependent on the energy sector for their GDP meaning that there will be powerful forces working towards a favorable outcome...the energy sector is literally "too big to fail" times a hundred.

2.  People need four things to survive - air, food, water and energy.  Right now the cheapest form of energy available is oil and due to obvious circumstances I do not see a lower priced contender stepping up anytime soon...which tells me that the energy sector will survive and eventually recover at some point in the future.

3.  Value premium is especially ripe in energy at the moment as the perception of risks are through the roof.  Looking at a fifty year time span of oil pricing shows that the commodity has not been priced so favorably in over a decade.  In fact, based on more recent history, it would be a very normal thing if oil were to rise back to $140 over the next several years.


All this being said, it isn't clear which energy companies will survive so I am sticking to energy sector funds in order to avoid specific company bankruptcy risks.  I am also attempting to extract income from selling volatility premium on oil itself.  Whatever you decide regarding the energy sector...don't over do it, stay diversified and think long term.

Read Next: Is Now the Time for an Oil Volatility Linked ETF?

Sunday, April 3, 2016

How I Became a Millionaire in my Thirties

Ten years ago, when I started the process of seriously growing wealth, I never thought in my wildest dreams that I'd be writing an article like this...nevertheless here I am writing it.  What follows are some of the best lessons that I've learned in reaching my goal of becoming a millionaire.

Saving more money is the more important than making more money

This is going to shock you but the single most important contributing factor to obtaining wealth at such an early age is the decision to save and invest 50% of our household income.  You might be screaming...how is it possible to live off of only 50%?!  It isn't easy but I think that it is just as difficult if not more so to live without any significant savings.  We shop at Target $TGT, Walmart $WMT, and Kohl's $KSS.  I mow my own lawn, clean my own modest home and drive old hand-me-down cars from my parents.  My wife and I both work and we jog around the park instead of paying for a gym if we want exercise.  There are countless examples but the main idea among all of them revolves around getting the most bang for your buck.  When you have to spend make sure that you are always getting every bit of value that you can and living off of 50% starts to become possible.

Making a lot of money takes a lot of patience

I think to myself every once in awhile, would I rather have a 10% chance at creating wealth quickly or a 90% chance at creating wealth slowly.  You have to develop the patience to wait for your investments to grow properly and this happens over years and decades not days or even months.  Take the time to read, learn and think about how to properly diversify your assets, position your investments over the longer term and use time to your advantage.  Like they say in real estate, location, location, location...with investing it's patience, patience, patience.

Set money goals that challenge yourself

Believe it or not, if you want to be wealthy you actually have to like investing money more than you like spending it.  One of the ways to train yourself to enjoy the process of growing money is to set realistic money challenges for yourself and then make those challenges more and more difficult over time as you begin reaching them.  For instance, now that I'm a millionaire do I want to go out and blow a bunch of money on a new Lexus?  No, I feel much better creating a new challenge of becoming a multi-millionaire.

Rediscover who you are

The path that I have taken towards financial success is not necessarily going to be the best path for someone else.  It is extremely important to align your method for creating wealth with who you naturally are as a person.  Think back to when you were a child...what types of things or situations did you gravitate towards or shy away from...were you conservative or aggressive?  Chances are that who you were back then is the same person that you are today and if you work with yourself instead of against yourself you'll find it so much easier to achieve the kind success that you've always wanted.

Education is a must

Getting a decent education allows you the opportunity to land a decent paying job that you can work hard at.  Once you have that job it becomes all about how much you can optimize your lifestyle to save and invest as much money as possible.  Balance is the key here...you don't want to over do it and burn out and you don't want to under do it and never reach financial success.  Keep an open mind, be ready to learn from your mistakes and think creatively about how to underspend without feeling overburdened.

The bottom line is that building wealth is all about spending more on things that rise in value and less on things that fall in value.  Dedicate yourself to this process and you’ll be giving yourself an excellent chance at becoming wealthy at some point in the future.

Read Next: Lifestyle

Saturday, February 27, 2016

Volatility as an Asset Class


The concept of volatility is nothing new and in fact options contracts, the primary method through which volatility is bought and sold, were actively used by investors as early as 1637 during the Tulip Mania.  So why, in this modern era of flash crashes and high frequency trading is volatility still a topic left on the back burner?  Is it because the topic of volatility is so mathematically complex that it does not work well with mainstream media or is it because of a persistent lack of financial education among the general investing public?  I think that the answer lies somewhere in between these two questions and I hope that this article helps some people to discover volatility as an asset class.

When you think of asset classes you normally think of things like Stock, Bonds, and Real Estate.  If you've been an investor for very long you've probably realized that diversification among asset classes is an absolute must and your portfolio is only stronger because of it.  The simplified way that I use to identify something as an asset is that it has the ability to rise in value or appreciate over time.  As an investor I want to put as much of my money into these types of things as possible.  I think inverse volatility fits perfectly into that definition because of volatility's natural tendency to depreciate over time.

Think about it, why should volatility persistently increase over time?  People continuously create, invent, and imagine new technologies that remove uncertainty in the world.  We have the resiliency and the resolve to work through difficult problems, learn from our mistakes and come out stronger on the other end.  The free market mechanism itself is designed to achieve efficient price discovery which is all about eliminating volatility and uncertainty.  Think about building a long term investment in the idea that fear and uncertainty generally subside over time.

I'll be the first to admit that taking a buy and hold or rather a sell and hold approach to volatility is not easy and can be quite dangerous if done incorrectly.  The first rule I would introduce would be that the investment should not lose more than initially invested which would rule out the use of margin.  The second rule would be that the investment should not overwhelm your entire portfolio but rather be complementary to it...always think diversification.  Finally, think about adding to this investment in small increments over time especially when every other financial news story has a doom and gloom tinge to it.

The mechanics of putting on an investment like this are normally meant for the sophisticated investor as it would require solid knowledge of options as well as a large enough portfolio to support optimally sized positions.  Say however that you are a novice and want to be involved in a small way.  Thankfully, there are several inverse volatility linked ETFs to use at your disposal.  These vehicles are a great way to be involved without having to manage your own options portolio.

Responsibly selling volatility is a great way to put time on your side and to turn the marketplace's tendency towards fear into a diversified income stream for your portfolio.  Remember, as with anything, don't over do it, be long term and stay diversified.



Saturday, January 30, 2016

Is now the time for an oil volatility linked ETF?


Unless your head has been buried in the sand for the past year you've probably noticed the extremely precipitous drop in the price of crude oil along with a corresponding rise in crude oil volatility.  Crude oil fell more than 70% from its high of $107.68 set on 6/12/14 to its low of $27.56 set on 1/19/16.  This rapid drop in the price of crude resulted in a more than 450% rise in the crude oil implied volatility index (OVX) within the same time period.

These are the types of opportunities I've learned to wait patiently for and act aggressively upon when they arrive.  Buying an inverse volatility ETF every time we get a huge volatility spike has been a profitable investment over the past couple of years.  I've heard all of the arguments regarding the dangers of being short volatility however I still believe that being short during times of extremely high volatility is an important income producing component of any well balanced portfolio.  The main reason for this belief is that the price discovery mechanism embedded in markets is designed to reduce volatility over time which tends to make inverse volatility a naturally appreciating asset.  Additionally, there appears to be a persistent fear factor embedded in markets that always expects future volatility to be higher than current volatility adding a convenient positive carry component to a short volatility position.

So based the premise mentioned above, shorting oil volatility in this environment would have been a nice addition to my portfolio.  The problem is that there is no easy ETF vehicle to use for gaining this exposure.  Being short volatility through an ETF is a nice fire and forget method for this type of exposure, otherwise you run into a never ending series of rolling options positions which usually results in more headaches and commissions than the position is worth.

So why hasn't any ETF issuer stepped up to the plate to provide volatility related exposure to the most important commodity in the world?  With a robust size of $3.1B as of the time of this writing the United States Oil ETF (USO) seems to warrant a couple of companion volatility and inverse volatility ETFs to help hedge against the extreme price movements in oil.  One reason I suspect is that even though USO is of fairly large size it pales in comparison to equity giants such as SPY which would lead one to assume that oil volatility linked products may not draw enough interest to be worth the trouble.

Even given the size issue I think that there are few things that could be going for any issuer that is first to market.  One is the notion that with inflation at near lows, commodity related investing could become increasingly more important in the years to come making a commodity volatility based instrument increasingly valuable as well.  Another is the potential exploration of alternative ways to extract value from commodity based investing.  By now, I think almost everybody notices the fundamental problem with commodity based funds, which is the significant decay that they experience due to the negative roll yield from a market in contango.  One possible solution to this problem is to pair commodity positions with a corresponding volatility position to help offset this decay effect.  This aspect may make commodity volatility instruments even more important to their respective markets than equity based volatility instruments.  Finally, income investing is becoming increasingly popular based on the increasing number of people reaching retirement every year. As stated previously, income from selling commodity based volatility could be a valuable alternative tool to help round out the fixed income segment of one’s portfolio.

Read Next: Volatility as an Asset Class