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Monday, August 7, 2017

If you want to play a miners ETF, watch out



So, normally, I'd go long miners with HGU.to on the TSX. It's double-long, and it used to follow the GDX in the US.

But now, with the change in the composition of GDX, I've noticed that HGU.to's correlation to it has been greatly damaged. Some days, GDX and HGU move in opposite directions.

This makes trading via HGU far more difficult, and something I'll avoid from now on as I don't need the extra work of quanting everything out.

By illustration of what a double-long ETF is supposed to do, just look at HSU vs SPY:



That black line along the bottom is kinda like what correlation is supposed to look line (though the past week's wobble away from 1 looks a bit concerning). Correlation between HSU and SPY should be nearly exactly 1.

Here's HQU vs QQQ:



Even better. Correlation is almost always 1.

But here's HGU vs GDX:


The big wobble in correlation at the start of June, and the bigger wobble throughout all of July, mean HGU is no longer a vehicle for trading GDX. I mean, a correlation dropping to 0.35 or so? I may as well trade Magna or Royal Bank to get exposure to gold miners.

I know this is because of the radical repurposing of GDX that happened in the US. And maybe that actually means you should use a non-repurposed Canadian gold miners ETF to do TA on gold miners from now on, and avoid looking at the GDX chart altogether.

It just surprises me, because I thought HGU.to gets its double-GDX correlation-one movement through trading of GDX forward options. I guess not. And I thought the purpose of HGU was to yield double the performance of GDX. Again, I guess not.

I could look up the details of how HGU works by looking at its info circular, but frankly until gold miners go on a tear, why bother opening the hood of another ETF? I won't have time to day-trade in September anyway.

But here's the warning for you Canadian readers. If you were wondering why your Canadian goldbug ETFs were all screwy, this is a clue as to why.


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