A UBS client recently lost 25% of her investment in the UBS Yield Enhancement Strategy. Essentially the strategy involved buying and selling out of the money call and put options at different strike prices to create a market-neutral strategy. However, in reality the strategy was taking large actively managed directional bets on the market. As a result, the heightened volatility late last year exacerbated losses causing almost 13% losses in one month.
The strategy was highly risky with almost 5 times the leverage. This leverage resulted in margin calls on clients and many were forced to liquidate their positions at huge losses. A point to note would be that after approving a 4X S&P 500 ETF, the SEC put the decision on hold.
A much better and sensible alternative to the investor would have been to invest in Vanguard S&P 500 ETF (VOO). This would provide the client with reasonable returns at minimal costs. As against the 1.75% fees to invest in UBS YES, the VOO has an expense ratio of just 0.03%. A major plus point for the Vanguard ETF would have been that the client would not have been forced to liquidate in adverse market conditions. As seen, after erasing almost all of the gains of 2017-18, the ETF bounced back and by 10/18/2019 was up nearly 30%.
Thus rather than being forced to liquidate the positions at significant losses, the investor could have held onto the ETF and rode the bounce back.
Market liquidity is something that investors don't need to worry about in this ETF since it's quite heavily traded. From an average volume of 52,200 units in 2010, the volume has risen quite sharply and is about 2.8 million in 2019. This also reflects the growing investor preference for ETFs over actively managed products.
For more details please contact jay.dave@stockqvest.com
Disclaimer: The above is for informational purpose only and is not to be construed as any investment advice. The author is not in any way affiliated with Vanguard.
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