Leveraged ETFs- a market inefficiency

Here’s how the inefficiency works.  Every day, leveraged ETFs have to trade to maintain a constant level of leverage.  The transaction costs of trading every day is very high since they often trade illiquid derivatives or swaps.  It’s not like they trade liquid products such as S&P 500 futures.  In a year with high volatility, a leveraged ETF could lose 20% of its net asset value to transaction costs.

One way to play this inefficiency is to short both the bull and bear versions of a leveraged ETF.  If you want, you could also rebalance the ETFs frequently so that you have no risk from a trending market.  (In a trending market, one ETF might go up several times while the other goes down close to 0.)  Unfortunately, many people seem to have caught on to this trade as leveraged ETFs frequently have borrow costs in the mid single digits.

I personally do not recommend this arbitrage trade… the risk/reward does not seem compelling to me considering the borrow costs.

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Advant-e Corporation (ADVC) / Arbitrage opportunity

From the press release, Advant-e has announced that it is essentially doing a tender offer for odd lots (anything not divisible by 10,000 shares) for $0.27 a share.  As of today, ADVC was trading between 23 and 27 cents a share.  I actually got filled today at 23 cents with Interactive Brokers (I placed my order on the weekend before I knew about the press release).

Reading round-up: books on mining

Here are the resources that I found the most helpful for understanding mining…

Book Review: Only the Paranoid Survive (by Andy Grove, former Intel CEO)

Key ideas in the book are:

1. Sometimes there are inflection points in an industry that changes everything, e.g. containerization of the shipping industry and the rise of the personal computer.  The trick is to (A) correctly identify what things are and aren’t inflection points and (B) re-invent the business if you are on the wrong end of an inflection point.
2. It is difficult for CEOs to make decisions that may be obvious to outsiders and to a company’s customers.

Overview of the semiconductor industry

I’m trying to expand my circle of competence to include the semiconductor industry.  Here’s how I see the industry so far.

Intel’s moat

Historically, semiconductor manufacturing has been a brutal industry yet Intel has outperformed its peers by a wide margin.  Here’s what I think is going on…

Heterogeneous computing / GPGPU (INTC, AMD, NVDA)

Heterogeneous computing refers to computing systems that use a mix of different types of computational units.  The type of heterogeneous computing that I am most interested in is rise of the general purpose graphics processing unit (GPGPU).  The industry trend has been to use the GPU graphics chip for purposes other than graphics.  Innovations in the GPGPU could cause some changes to the landscape between Intel, AMD, and Nvidia.  I believe that heterogenous computing will grow from a small niche into a larger one.