On Friday in Flight-to-Safety ETP Performance During Invasion of Ukraine, I reviewed the performance of some of the traditional flight-to-safety ETPs (Treasuries, gold, currencies and volatility) that are often used to hedge an equity-centric portfolio.
Evaluating the
performance of these ETPs since Russia invaded Ukraine a
little over a month ago, I found some rather lackluster numbers. As a group, these products have not even
broken even since the invasion of Ukraine.
This time around, I have elected to look at the performance of some less traditional ETPs, including some much more targeted products that I have referred to in the past as “point hedges.” Specifically, I looked at areas where exports from Russia and Ukraine are a significant portion of the global export market and whose disruption could have a significant impact on the global balance of supply and demand. As it turns out, these commodities were easy to identify and the price dislocations have generally dwarfed the appreciation one might have been able to realize with more traditional hedges.
These products include:
USO: West Texas Intermediate
Crude Oil (solid red line)
UNG: Natural Gas
(dark purple line)
DBB: Base Metals
(light green line)
DBA: Agriculture
(violet line)
WEAT: Wheat (light
blue line
CORN: Corn
(black line)
ITA: Aerospace &
Defense (medium blue/green line)
[Note that nickel (JJN) should be on this list, but in part due to some chaos and mismanagement at the London Metal Exchange, JJN prices jumped have had multiple spikes of more than 100% and dwarf the performance of other ETPs in this graphic. Additionally, for the international crude oil market, Brent crude oil (BNO) is typically a better measure than USO, but since the Russian invasion of Ukraine, the two ETPs have only differed in performance by about 2%.]
It is easy to
play Monday morning quarterback and say that with hindsight it is easy to pick
the winners, but anyone who studied Ukraine’s biggest contributions to the global
export market could have deduced that a supply shortage in wheat and corn was
likely and for Russia, natural gas, crude oil and nickel were three areas of
high risk in terms of their strategic value to the West, with wheat and corn
also part of the equation. I threw in
aerospace & defense as a general military hedge.
Unlike the inconsistent and largely negative performance of more traditional flight-to-safety
ETPs since the Russian invasion, the point hedges above have all seen gains of
at least 3% during this period – and if you remove aerospace & defense from
the mix, all the gains are at least 6.8% or higher.
This is not to say that more narrow point hedges will usually outperform the
broader traditional hedges during periods of geopolitical turmoil, but rather
to remind readers that instead of a more generic hedge, a targeted hedge or
speculative trade often has the potential to deliver substantially greater
returns, such as the median 13% returns from the group of ETPs above.
This also means,
of course, that should there be progress in the talks between Russia and
Ukraine that each of these point hedges is exposed to the potential of a
significant decline in price.
[source(s): StockCharts.com]
Further
Reading:
Flight-to-Safety
ETP Performance During Invasion of Ukraine
Safe
Haven Options Shrinking?
Chart
of the Week: Flight-to-Safety ETPs
Revisiting
the Flight-to-Safety Trade
Chart
of the Week: The Flight-to-Safety Trade
Why
Not Point Hedges?
Cheating
with Partial Hedges
Forces
Acting on the VIX
A
Conceptual Framework for Volatility Events
While it has not been updated in a while, new readers may also enjoy older
posts that have been tagged with the Hall of
Fame label.
For those who may be interested, you can always follow me on Twitter at @VIXandMore