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On the Use of Leveraged-Inverse ETFs to Hedge Risk in Publicly Traded Mortgage Portfolios

Richard J. Curcio, Randy I. Anderson and Hany Guirguis
The Journal of Beta Investment Strategies Winter 2015, 6 (3) 40-57; DOI: https://doi.org/10.3905/jii.2015.6.3.040
Richard J. Curcio
is professor emeritus in the College of Business Administration at Kent State University in Kent, OH, and associate lecturer, finance and real estate in the Department of Finance and the Dr. P. Phillips School of Real Estate at the University of Central Florida in Orlando, FL.
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  • For correspondence: richard.curcio@ucf.edu
Randy I. Anderson
is chief economist and portfolio manager at Griffin Capital Corp. in El Segundo, CA.
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  • For correspondence: randerson@griffincapital.com
Hany Guirguis
is professor and chair in the Department of Economics and Finance at Manhattan College School of Business in Riverdale, NY.
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  • For correspondence: hany.guirguis@manhattan.edu
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Abstract

The authors evaluate U.S. Treasury and real estate indexed leveraged-inverse exchanged traded funds (LIETFs), mortgage-based put options, and real estate futures as risk hedges in publicly traded mortgage portfolios under conditions of large and rapid interest rate increases. They find that two LIETFs, TBT and TTT, indexed to U.S. 20+ year T-bonds, were the most effective and efficient risk hedges. TTT performed the best. TYO, a LIETF indexed to 7–10 year U.S. T-notes, performed poorest overall. Liquidity issues limited the effectiveness of mortgage-based put options. Real estate futures proved less successful than the best of the LIETFs. The authors find that the advantages of LIETF include simplicity of implementation, limited loss potential, and high liquidity; additionally, tracking error was not a problem over the lengthy risk hedge implementation period for the LIETFs. The authors conclude that the potential for severe tracking error, when used beyond a single trading day, is the primary limitation of LIETFs, so caution is appropriate, and frequent monitoring and management by skilled traders and well-informed portfolio managers are essential.

TOPICS: MBS and residential mortgage loans, real estate, exchange-traded funds and applications, portfolio construction

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The Journal of Index Investing: 6 (3)
The Journal of Beta Investment Strategies
Vol. 6, Issue 3
Winter 2015
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On the Use of Leveraged-Inverse ETFs to Hedge Risk in Publicly Traded Mortgage Portfolios
Richard J. Curcio, Randy I. Anderson, Hany Guirguis
The Journal of Beta Investment Strategies Nov 2015, 6 (3) 40-57; DOI: 10.3905/jii.2015.6.3.040

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On the Use of Leveraged-Inverse ETFs to Hedge Risk in Publicly Traded Mortgage Portfolios
Richard J. Curcio, Randy I. Anderson, Hany Guirguis
The Journal of Beta Investment Strategies Nov 2015, 6 (3) 40-57; DOI: 10.3905/jii.2015.6.3.040
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  • Article
    • Abstract
    • REAL ESTATE RISK
    • RISK MANAGEMENT
    • LEVERAGED ETFS
    • UNDERSTANDING TRACKING ERROR
    • ANALYSIS OF TRACKING ERROR
    • RESEARCH DESIGN
    • ANALYSIS
    • SUMMARY AND CONCLUSIONS
    • ENDNOTES
    • REFERENCES
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  • PDF (Subscribers Only)

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