Skip to main content

This week's financial innovations

There's been some interesting news lately of innovations in the financial markets. A number of new and previously unseen products were released onto the markets over the course of the past year, and during the week the just ended.

The rise of exchange traded funds, coinciding with the accelerating popularity of commodities, has brought about the creation of several new ETFs based on assets once relegated to the futures exchange. Market particpants can now take positions in gold, silver or oil as though they were buying a stock, but that is not all. Soon it may be possible for some intrepid souls to speculate in an asset class new to financial exchanges: residential homes.

Flipping houses, bacon

Just one of the week's recently launched products, the Chicago Mercantile Exchange housing futures began trading May 22. The CME housing contracts are based on ten different city markets and a composite housing index.

So far the market has been slow to take off; a total of 52 contracts traded the first day. A Globeandmail.com story reported that not only are some skeptical about the market's ability to catch on, but that it can claim to accurately represent something so diverse as residential housing. Chicago real estate mogul Sam Zell offers his take:

"Houses are not the same," said Sam Zell, chairman of Chicago-based Equity Office Properties Trust and Equity Residential, the biggest U.S. apartment owner.

"It's very hard to come up with a kind of trading instrument that would truly reflect the risk and the reward when in fact the basic asset is not the same."

Despite pessimism from some observers, the CME and its partners are hoping that the contracts, based on the repeat sales analysis of the S&P/Case-Shiller Home Price Indices, will prove to be a reliable gauge of home price activity and a useful hedging instrument for property owners, builders and investors.

Leveraged ETFs

Reuters reported on Wednesday that ProFunds Advisor won approval to introduce 12 new ETFs, some of which will employ leverage. From Reuters:

The new funds, which would be known as ProShares, seek to offer double the daily performance of a market index, or double the inverse, or opposite, daily move of an index. Four of the 12 will not use leverage but seek to offer the inverse daily move of an index.

The ProShares funds will use borrowing, futures contracts and various other methods to create the desired leverage. While some mutual funds have used leverage for several years (some of the Rydex funds come to mind), industry insiders mentioned in Reuter's story say leveraged ETFs are an entirely new product. Apparently these ETFs have been long in the coming, with Index Funds Advisor's Jing Sun reporting on their development back in 2002.

A Gold Miner's ETF

Also new on the ETF front is the Market Vectors-Gold Miner's ETF (symbol:GDX), which began trading earlier this week. While previous gold-related entrants to the ETF market focused on tracking the metal, the new Gold Miner's ETF will actually follow an AMEX index of gold mining stocks. The AMEX Gold Miners Index (^GDM) and its components can be seen at Yahoo! Finance. The Gold Miner's ETF was brought out by Van Eck Global, who introduced America's first gold-mining stock mutual fund in 1968.

More to come?

All this and we have yet to mention the expanding horizons being explored by the financial exchanges in their round of merger mania.

Should Euronext accept a merger bid from the New York Stock Exchange, it will create the first transatlantic share market and give the NYSE entry into the European derivatives market (via Euronext-owned Liffe).

Meanwhile, the Swiss Exchange is looking to guard its independance but has teamed up with Deutsche Boerse in a venture that will expand their joint offerings of securitized derivatives. According to a recent report in the Financial Times, the suite of offerings grows ever more complex but this does not hinder demand.

Led by banks in Germany, Switzerland and Italy, investors have been confronted by a bewildering range of structured products. While some, such as warrants, are familiar, others, such as highly complex synthetics with exotic trademarks, are harder to grasp.

But whatever their characteristics, demand is booming, whether from retail investors seeking guaranteed returns along with some downside capital protection, or institutions looking for more arcane products. The number of monthly new listings on the SWX alone doubled from 700 in the autumn to more than 1,400 in March.

That's all for this installment. Have a great week, everyone.

Popular posts from this blog

The Dot-Com Bubble in 1 Chart: InfoSpace

With all the recent talk of a new bubble in the making, thanks in part to the Yellen Fed's continued easy money stance, I thought it'd be instructive to revisit our previous stock market bubble - in one quick chart.

So here's what a real stock market bubble looks like. 

Here's what a bubble *really* looks like. InfoSpace in 1999-2001. $QQQ$BCORpic.twitter.com/xjsMk433H7
— David Shvartsman (@FinanceTrends) February 24, 2015
For those of you who are a little too young to recall it, this is a chart of InfoSpace at the height of the Nasdaq dot-com bubble in 1999-2001. This fallen angel soared to fantastic heights only to plummet back down to earth as the bubble, and InfoSpace's shady business plan, turned to rubble.

As detailed in our post, "Round trip stocks: Momentum booms and busts", InfoSpace rocketed from under $100 a share to over $1,300 a share in less than six months. 

In a pattern common to many parabolic shooting stars, the stock soon peaked and began a…

New! Finance Trends now at FinanceTrendsLetter.com

Update for our readers: Finance Trends has a new URL! 

Please bookmark our new web address at Financetrendsletter.com

Readers sticking with RSS updates should point your feed readers to our new Finance Trends feedburner.  



Thank you to all of our loyal readers who have been with us since the early days. Exciting stuff to come in the weeks ahead!

As a quick reminder, you can subscribe to our free email list to receive the Finance Trends Newsletter. You'll receive email updates about once every 4-8 weeks (about 2-3 times per quarter). 

Stay up to date with our real-time insights and updates on Twitter.

Moneyball: How the Red Sox Win Championships

Welcome, readers. To get the first look at brand new posts (like the following piece) and to receive our exclusive email list updates, please subscribe to the Finance Trends Newsletter.

The Boston Red Sox won their fourth World Series titleof the 21st century this week.

Having won their first Series in 86 years back in 2004, the last decade-plus has marked a very strong return to form for one of baseball's oldest big league clubs. So how did they do it?

Quick background: in late 2002, team owner and hedge fund manager,John W. Henry(with his partners)bought the Boston Red Sox and its historic Fenway Park for a reported sum of $695 million.

Henry and Co. quickly set out to find their ideal General Manager (GM) to help turn around their newly acquired, ailing ship.

This brings us to one of my favorite scenes from the 2011 film, Moneyball, in which John W. Henry (played by Arliss Howard) attempts to woo Oakland A's GM Billy Beane (Brad Pitt) over to Boston with an excellent job off…