Managing Volatility in Chaotic Markets Live Webinar July 29, 2010 2:00 3:00 pm EDT
Welcome What is Volatility Volatility in Context Dave Nadig Director of Research IndexUniverse Managing And Capturing Volatility IndexUniverse.com Exchange-Traded Funds Report Journal of Indexes
Panel Discussion Joanne Hill Head of Investment Strategy ProFunds Group Dave Nadig Director of Research IndexUniverse Tim Collins Founder & Principal TangleTrade Management
What Is Volatility? Annualized Standard Deviation of Price Movements Standard Deviation: The 68% Center Source: Options Playbook
What Is Volatility?
What Is Volatility? 50% 3-Yr Rolling Annualized DJIA Returns 10-Yr Rolling Annualized DJIA Returns 25% 0% -25% -50% 1902 1912 1922 1932 1942 1952 1962 1972 1982 1992 2002 Source: ProFunds Group
Time Frame Matters
What s Normal? Upside risk = Retirement Downside risk = Poverty 1000 900 800 700 600 500 400 300 200 100 0 S&P 500, 10 Year Daily Returns 99% of Returns
What s Normal
Implied vs. Historical
Portfolio Impacts 300 250 200 ETF A ETF B Both ETFs have Average growth rates of 10% 150 100 ETF A: Std Dev of 0 ETF B: Std Dev of 24% 50 0
What Is Volatility? Average 30-day volatility over the past year Russell 2000: 24.60 S&P GSCI: 24.58 MSCI EAFE: 19.21 S&P 500: 18.02 Gold: 17.12 iboxx Liquid High Yield Bond Index: 4.91 Barclays Aggregate Bond Index: 3.60
What Is Volatility? Gold: 17.12 S&P 500: 18.02 Russell 2000: 24.60 MSCI EAFE: 19.21 Barclays Aggregate Bond Index: 3.60 iboxx Liquid High Yield Bond Index: 4.91 Average 30-day volatility over the past year
Joanne Hill Head of Investment Strategy ProFunds Group
Volatility in Perspective Joanne Hill, Head of Investment Strategy For Financial Professional Use Only: Not For Public Distribution 15
To get a prospectus Carefully consider the investment objectives, risks, and charges and expenses of ProShares or ProFunds before investing. This and other information can be found in the summary and full prospectuses. Read them carefully before investing. For a ProShares prospectus, visit proshares.com. For a ProFunds mutual fund prospectus, visit profunds.com. ProShares ETFs and many ProFunds employ leveraged investment techniques that magnify gains and losses and result in greater volatility in value. Each Ultra and Short ProShares ETF and leveraged or inverse ProFund seeks a return that is a multiple or inverse multiple (e.g. -200%) of the return of an index or other benchmark (target) for a single day. Due to the compounding of daily returns, Ultra and Short ProShares and leveraged or inverse ProFunds returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period. Investors should monitor their holdings consistent with their strategies, as frequently as daily. For more on correlation, leverage and other risks, please read the ProShares or ProFunds prospectus. ProFunds Group includes ProFunds mutual funds and ProShares ETFs. ProFunds are distributed by ProFunds Distributors, Inc. ProShares registered under the Investment Company Act of 1940 are distributed by SEI Investments Distribution Co. (One Freedom Valley Dr., Oaks, PA 19456), which is not affiliated with ProFunds Group or its affiliates. For Financial Professional Use Only: Not For Public Distribution 16
The Many Dimensions of Volatility Time - Looking at volatility levels across different time periods can provide helpful insights Cycles Reviewing historical volatility reveals distinct cycles that rotated from periods of low-to-average volatility to short bursts of higher volatility Correlation and Trends Volatility had the tendency to trend more than return measures and to be highly correlated across indexes Portfolio Implications Monitoring the 90-day volatility can help identify potential directional trends in volatility For Financial Professional Use Only: Not For Public Distribution 17
Historical i spikes in quarterly volatility led upward shifts in long-term trends S&P 500 Quarterly and Annual Volatility 1928-2010 66% (12/31/29) 68% (12/31/08) 61% (9/30/32) 58% (12/31/87) Source: Bloomberg. Note: Quarterly and annual volatility (rolled quarterly) were calculated using daily return data and annualized from 12/31/1927 to 3/31/2010. For illustrative purposes only. Historical volatility does not predict future volatility. Volatility is not an indication of performance. For Financial Professional Use Only: Not For Public Distribution 18
Volatility Measures Trend More than Return Measures Serial Correlation of S&P 500 Quarterly Return Versus Volatility, 1950-2009 Source: Bloomberg. Note: Quarterly price return and annualized volatility of daily returns over each quarter from 12/31/1949 to 12/31/2009. For illustrative purposes only. Historical volatility does not predict future volatility. Volatility is not an indication of performance. For Financial Professional Use Only: Not For Public Distribution 19
Volatility across Indexes was More Correlated than Return Correlation of Index Volatility Measures to S&P 500 Volatility, 1995-2009 Index Return Volatility MSCI EAFE 0.87 0.91 Dow Jones Industrial Average 0.95 0.99 S&P 400 Midcap 0.91 0.96 Russell 2000 0.90 0.91 NASDAQ-100 084 0.84 069 0.69 Source: Bloomberg. Note: Correlation of quarterly returns and 90-day volatility (nonoverlapping) levels from 12/31/1994 to 12/31/2009. For illustrative purposes only. Historical volatility does not predict future volatility. Volatility is not an indication of performance. For Financial Professional Use Only: Not For Public Distribution 20
Putting Index Volatility in Perspective Historical volatility measures for 9 broad indexes over a 10-year period (2000-2009). Measures volatility using daily index returns over rolling 90-calendar day periods. 1 Represents the highest volatility calculated for any 90-calendar day period over the 10 years. 2 Represents the average daily price move (up or down) for the index from 2000 to 2009. For illustrative purposes only. Historical volatility does not predict future volatility. Volatility is not an indication of performance. Source: ProFunds Group Investment Analytics. Data source: Bloomberg. Volatility is calculated using rolling 90-calendar day periods (each including about 62 trading days) from 2000 to 2009. Results for other indexes will differ. Funds that track an index may have different volatility than For the index. Financial For illustrative Professional purposes Use Only: only. Historical Not For Public volatility Distribution does not predict 21future volatility. Volatility is not an indication of performance.
Wider Swings in Volatility for Sectors Historical volatility measures for 11 sector indexes over a 10-year period (2000-2009). Measures volatility using daily index returns over rolling 90-calendar day yperiods. 1 Represents the highest volatility calculated for any 90-calendar day period over the 10 years. 2 Represents the average daily price move (up or down) for the index from 2000 to 2009. Source: ProFunds Group Investment Analytics. Data source: Bloomberg. Volatility is calculated using rolling 90-calendar day periods (each including about 62 trading days) from 2000 to 2009. Daily return data was not available as of 12/31/1999 for the Dow Jones U.S. Sector Indexes, which For started Financial one Professional 2/14/2000. Results Use Only: for other Not indexes For Public will differ. Distribution Funds that track 22 an index may have different volatility than the index. For illustrative purposes only. Historical volatility does not predict future volatility. Volatility is not an indication of performance.
What Does Dynamic Index Volatility Mean for Your Investment Process? Monitor short-term (90-day) volatility measures against historical medians and ranges Have a plan when: Volatility measures show signs of rising significantly Look to defensive portfolio tactics or potentially increase positions that have low or negative correlations to other holdings Consider adding strategies with long volatility exposures (tail risk hedges) Volatility measures show signs of falling or approaching historical levels Consider shifting out of defensive posture Seek to increase beta or leverage Attempt to increase returns from short volatility exposure For Financial Professional Use Only: Not For Public Distribution 23
More about risk ProShares ETFs and many ProFunds entail certain risks, including, aggressive investment techniques (futures contracts, options, forward contracts, swap agreements and similar instruments), imperfect benchmark correlation, leverage and market price variance, all of which can increase volatility and decrease performance. Investments in smaller companies and narrowly-focused investments, including single country funds, typically exhibit higher volatility. International investments may also involve risk from unfavorable fluctuation in currency values, differences in generally accepted accounting principles and from economic or political instability. In emerging markets, all these risks are heightened, and lower trading volumes may occur. Bonds will decrease in value as interest rates rise. In addition to the normal risks associated with investing, technology companies may be subject to the severe competition and product obsolescence. ProShares and some ProFunds are non-diversified investments. For more information on possible risks please see summary and full prospectuses at proshares.com or profunds.com. For Financial Professional Use Only: Not For Public Distribution 24
For more information www.proshares.com www.profunds.com 866-PRO-5125 For Financial Professional Use Only: Not For Public Distribution 25
Measuring Volatility
Understanding VIX If VIX = 10, then, EXPECTED VALUE CHANGE OF THE S&P = 10%/[square root (12 months)] = +/- 2.89% over 30 days
Measuring Volatility: VIX
Positioning for High Volatility Consider reducing risk profile: - Simple diversification - Long/Short - Suicide Puts - Straddles
Playing With Vol: Options & Futures
Playing With Vol: ETFs
Conclusion
Panel Discussion Joanne Hill Head of Investment Strategy ProFunds Group Dave Nadig Director of Research IndexUniverse Tim Collins Founder & Principal TangleTrade Management
Thank You! For more information: www.indexuniverse.com dnadig@indexuniverse.com www.proshares.com www.profunds.com www.tangletrade.net