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Very glad to see this strategy added. Some guidance on the practicalities and tax implications (for a US investor) of the various approaches to implementing it would be much appreciated. An advantage I see of the ETFs is that they are straightforward to trade; disadvantages are that CROC, EUO and YCS have fees of around 1% and give rise to K-1s. I have less experience with futures and with currency pairs. Do the tax treatments of the three approaches differ significantly?
Experimenting with the concept of this strategy, I have seen limitations with CROC daily volume (as in unfilled orders) even for balances in the 10k range, and quite similarly for YCS but starting with 100k balance.
What is your take on these limitations and eventually how does this impact including the GCIS strategy in a real-life set-up ?
I liked this strategy idea, especially as part of a larger strategy of strategies. But I also feel it has issues with implementation, at least for me at Interactive Brokers in an IRA account.
During opening of a position in YCS I got an error stating this security is not allowed in IRA accounts. I was able to open a position in YCS in my regular brokerage account. Apparently, IB has removed about 200 securities from IRA accounts.
Here is what they said to me: We have implemented a restriction whereby IRA accounts will be prohibited from opening positions in a list of approx. 200 Limited Partnership securities these type of securities introduce reporting considerations and costs that we’ve concluded are not justified given the overall low level of client interest in them.
As a result of this decision, IB is no longer accepting opening orders for such securities and we ask that you either close or transfer these positions to an IRA account maintained with another broker at your earliest convenience.On this list are YCS, EUO, CROC, and UUP. I have the full list if anyone is interested.
Would it make sense to buy puts on FXY?
IB has restricted three times leveraged ETF from their IRA accounts. You can instead use non-leveraged ETFs and increase their allocation to keep the intended leverage ratio. This dilutes the overall effect in the portfolio, e.g. you need to allocate less to GLD to keep 100% overall, but is the only way currently.
Alternatively, you can buy the 3x ETF in a non-deferred account as you mention. Buying puts also will not be allowed in your deferred account, and doing so in a regular account requires very good knowledge of the “greeks”.
Alex,
I ran into the same issue with YCS and instead, I am using the ETF DXJ which has a correlation of .76 to YCS.
It is doing rather well in this environment even though it is only a 1X instrument. You said one could adjust the leveraged ratio to account for the 3x YCS position….I want to make sure I would be doing this correctly…
Assuming a 60GLD/40YCS ratio….(3:2)
To get the correct leverage using my DXJ example, would the correct resulting “leveraged ratio be 3x on the DXJ side??
something like 3:6 or 1:2???
Thus 33GLD/67DXJ??
Or am I calculating the implied 3x incorrectly??thx
Bama[quote quote=44667]…..You can instead use non-leveraged ETFs and increase their allocation to keep the intended leverage ratio. This dilutes the overall effect in the portfolio, e.g. you need to allocate less to GLD to keep 100% overall, but is the only way currently……
[/quote]Hi Mark,
yes, my brain just does it the other way around. 60 GLD / 40 YCS equals 60 GDL / 120 DXJ, total 180 so divided by 1.8 would be 33 Gld and 67% DXJ. So you dilute by a factor of 1.8, which means also returns, etc would be reduced by that factor .. bit less considering the loss leveraged ETF occur.
Thanks Alex…As long as we got to the same answer, we should be fine….
I decided to do a 50/50 with DXJ/GLD…which in effect gives me a 1.5x on the DXJ for this go around….
I will see how it goes…
thanks
Mark (bama)[quote quote=45288]Hi Mark,
yes, my brain just does it the other way around. 60 GLD / 40 YCS equals 60 GDL / 120 DXJ, total 180 so divided by 1.8 would be 33 Gld and 67% DXJ. So you dilute by a factor of 1.8, which means also returns, etc would be reduced by that factor .. bit less considering the loss leveraged ETF occur.
[/quote]Frank,
I have a question re the use of CROC as the currency hedge. Its volumes are so low, how it is effectively traded?Since it has not been nominated since I got into the GC strategy, it has not been an issue to date.
I am about 20% in GC.
I´m getting an average spread of 10 cents when looking for today, so you could set a limit order at mid-point or even below and wait some minutes if it fills. If you use interactive broker, you can use the “IBOrder – SMART”, which will move your bid slowly for a best fill – probably other brokers have similar tools.
Alternatively, if you have an margin account and can trade FX, you can sell/buy AUD in the double amount or % allocation to mimic the 200% inverse leverage – then you benefit from much higher volume and basically no spread.
What do you think is tbe best way to execute this strategy via a regular (non-IRA) Interactive Brokers account? I read somewhere that since September 2016 Interactive Brokers has stopped US people from opening leveraged forex positions unless they have assets over $10 million.
Up to our knowledge the limitation is only for inverse leveraged ETF in pension accounts, e.g. IRA or 401k. With a standard account you should be able to trade the ETF CROC with a limit order as stated above.
If you cannot trade CROC or use leverage, then the only way is to use FX without leverage, and re-calculate your allocation so you mantain the original leverage in CROC and YCS, so reduce GLD accordingly to stay within 100%.
I believe the ETF route is perfectly viable, but am wondering what you think the best approach is (vis-à-vis simplicity, cost, whether a little leverage can be applied cheaply, tax efficiency,….). My impression is that you and your colleagues have experience with IB. How do you like to execute this strategy?
I am in the same boat with Fidelity. CROC is not allowed in my IRA/401k. I was able to get around this when the selection was YCS by using 2x the number of the DXJ etf. I have not found a suitable replacement for CROC and really don’t Want to wade into the world of FX. I will keep looking..
[quote quote=47221]Up to our knowledge the limitation is only for inverse leveraged ETF in pension accounts, e.g. IRA or 401k. With a standard account you should be able to trade the ETF CROC with a limit order as stated above.
If you cannot trade CROC or use leverage, then the only way is to use FX without leverage, and re-calculate your allocation so you mantain the original leverage in CROC and YCS, so reduce GLD accordingly to stay within 100%.
[/quote]Hi Mark, I hear you and this is really a pain in the neck. It´s just that using Gold and FX is such a nice hedge, but indeed hard to trade in deferred accounts. We also keep looking for alternatives, please drop us a line if you find something at your end.
I normally prefer doing direct FX, so short either Yen or Aussie. The fees from the borrowing are lower than the sum of ETF cost and leverage effect, and I see the FX effect directly in my “virtual FX account” which is helpful as I also have some other currencies. The latter is not much of a benefit if you only run USD normally.
Alex,
So it tuns out that the currency ETF’s you use in this strategy are not allowed in my Fidelity Brokerage Link account. They were, however, allowed in my normal IRA..(I think I had to sign an “aggressive investor status form” a while back that allows it….Regardless, I am in with CROC…the spread was only .06 when I made the trade….I put it right in the middle and it filled quickly….
(sidenote: On Friday, CROC had its highest Volume in 4+ years with 64,600)Mark
[quote quote=47962]Hi Mark, I hear you and this is really a pain in the neck. It´s just that using Gold and FX is such a nice hedge, but indeed hard to trade in deferred accounts. We also keep looking for alternatives, please drop us a line if you find something at your end.
[/quote]I am wondering whether you can shed some light on the recent performance and allocation of the strategy. Over the past few months, YCS has been outperforming GLD, but yet, the model is recommending allocation of 70-80% to GLD (the underperforming asset) as opposed to weighting YCS or other long USD ETF higher. Intuitively, it doesn’t seem the strategy is following the USD strength momentum by overweighting the long USD etf. Looking forward to hearing your thoughts.
The Gold strategy is thought to be a “Gold” strategy not a currency strategy, so the currencies should only be used to reduce Gold price losses due to a strong US$. At the moment we are invested 20% in YCS which means that we hedge 40% of the currency risk. It would be very dangerous to invest too much in these 2x leveraged currency ETFs, because they can do wild unpredictable moves if a national bank changes money politics.
Another reason that the YCS hedge allocation is still quite low at the moment is, that the Gold was still flat for the year until May, so most of the 6% down this year happened in June.
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