Here we are at almost the end of April and were it not for the intentional reminders as to the date, it certainly feels like the long day continues. Still, the goalposts matter. While dates aren’t moveable, it seems like other goalposts are being moved on DIY investors. Also, on the topic of goalposts, this post has some news of discount brokerages crushing their goals.
In this edition of the Roundup, we review an important development for DIY investors in which leveraged ETFs attached to the oil market have had to do some, um, creative maneuvering to stay liquid even though movement in oil appears to be grinding to a halt. From there, we flow into even more data from the online brokerage space on the scale and scope of activity by DIY investors entering into this market. As usual, we’ve collected chatter from investors online on Twitter and in the investor forums.
Consolidation Offers Little Consolation
There’s no denying it. These are bizarre times for even the most seasoned traders. This past week, with oil prices going negative to the tune of almost -$40 a barrel for WTI, the trading world was turned on its head, and with it, likely scores of DIY investors who sought to take advantage of the volatility swings in the price of oil via leveraged ETFs.
Alas, even the ETF providers could not stomach the volatility and certainly did not ever envision (or provision for) a world in which the price of oil could drop below zero. And yet, this is exactly what happened this past week.
One of the biggest Canadian names in the leveraged ETF plays for oil, Horizons ETFs, temporarily suspended new subscriptions for their BetaPro Crude Oil 2X Daily Bull/Bear products. In addition, the impacted ETFs (HOU/HOD) will no longer be set to double the daily performance of the underlying futures index they were tied to, but will instead correspond to 1X the daily performance. Finally, how they trade futures contracts is changing, with the underlying “roll dates” moving to the secondary futures contract month just 10 days into the primary contract.
Another big name in the leveraged ETF space, Direxion, had already taken measures to dial back their famous 3X leveraged products by 1X to now provide a leveraged exposure of 200% to a select set of indices.
As with the crypto and cannabis craze from 2018, the prospect of making lots of money in a short amount of time naturally pulls in speculators.
Products, such as leveraged ETFs, magnify the already volatile market movements, so “investors” get the possibility to make (or lose) significant returns in a short amount of time with the ease of buying or selling a stock. There is no need for any sophisticated transaction in a futures market: Just enter a ticker symbol with an online brokerage platform and go. Added to that, these leveraged ETFs can be part of a TFSA or RRSP, and the gains (or losses) can offer up the perfect storm of opportunity to grow wealth (or erode it) at a pace that far outstrips salary growth, high-interest savings accounts or even the moves in most individual securities.
It wasn’t just leveraged ETFs in the oil market that suffered catastrophic failures either. The popular United States Oil Fund (ticker USO), which is supposed to track the price of oil, has been decimated by the volatility in oil prices and last week initiated an 8-for-1 reverse stock split (aka consolidation) to boost the price per share.
After vaporizing billions from unweary investors this week alone, the retail killer USO begins the day at a 36% premium to its current asset value of $2.06. Reverse splitting garbage continues to give you garbage.#USOIL #USO #supercontango pic.twitter.com/D2pqPpISjW
— 😷Kyle Bass😷 (@Jkylebass) April 22, 2020
Like some of its leveraged Canadian counterparts, the futures contract that the fund tracks has been pushed further forward, meaning that investors are betting on the price of oil much further into the future than they have historically with this kind of vehicle. There is some damning commentary coming out of the US for commodity-focused ETFs, and as such the “future” of these kinds of ETFs, especially those focused on oil, is highly questionable. The pessimism on these ETFs in the US market is high and growing, which portends bad news for the Canadian counterparts.
Ultimately, DIY investors interested in making a quick buck may roll the dice with a leveraged ETF without fully understanding the vehicle itself. This puts Canadian online brokerages in a bit of a conundrum. On the one hand, these ETFs generate substantial commission revenue, but on the other, their risk profile is not like that of other ETFs, and clients can be at serious risk of loss.
Some of the more spectacular losses that made the news include Interactive Brokers, which had to take almost a USD $90 million-dollar loss because several clients took heavy losses on their trading account, trading oil future contracts. And, investors in China who were able to trade individual barrels of oil found themselves on the hook for the negative price per barrel, meaning not only did they lose what they invested, they were exposed to the downside as well.
Although Canadian online brokerages are technically order-execution-only entities, the current COVID-19 fueled market conditions show that extreme volatility can take investors seriously offside, especially in some of the most popular products. The drastic maneuvers taken by the ETF issuers highlight the risks that ETFs themselves present to DIY investors – especially if they have leveraged ETFs within their stable. While providing advice on what is or is not an appropriate investment is not something online brokerages want to wade into, perhaps more visible warnings or tools that enable investors to easily discern risks seem like the prudent thing to be doing.
Putting the Pieces Together
There is a recurring theme to the data we’ve been reporting for the past several weeks: Now is a great time to be an online brokerage.
Updates from online brokerages on both sides of the border have been trickling in from various sources, including earnings reports, business updates and posts in various forms of reporting. The numbers continue to paint a picture where retail investors are flooding into the market in record-breaking numbers.
This past week, we learned a bit more about the scope of the DIY investor rush into the online investing market, as well as some insights and perspectives from leaders at several online brokerages who’ve commented on their business and business conditions.
Although we did mention them previously in last week’s Roundup, the largest online brokerage in the US, Charles Schwab, provided their spring business update this past week. This session provided additional colour on the numbers from the recent quarterly release as well as updates on where they’re forecasting for the remainder of the year. Of particular interest in this update was the scale and speed of the new account and asset growth. Schwab added 609K during Q1 of 2020, a 58% increase over the same period in 2019. Similarly, there was a 42% increase in net new assets, clocking in at USD $73.2 billion dollars.
Additionally, there was some interesting colour added to why cash balances were growing to the heightened levels. While during times of volatility, it was expected that cash would increase (e.g. investors may flee to cash for safety), what was curious was that it was more so a result of sales of fixed income assets rather than equities.
Another area that Schwab provided more detail on was the trading volume as well as the increase in volume from customer service touches. Despite the spike in business, the retail call volume was only 16% higher for Q1 2020 compared to Q1 2019. On the digital side, there was a 30% increase in digital logons across both mobile and online. This particular point about increased outreach of clients is interesting to compare against the Canadian experience; assuming that Canadian online brokerages are seeing comparable volume increases for calls, it is remarkable to hear the level of complaints and delays for such a modest spike in call volume. Again, this is simply an assumption based on the US market as a proxy for Canadian discount brokerages, so the increase in Canada could be substantially different.
At the other end of the spectrum of the online brokerage space in the US – at least as far as size and age is concerned – is news from Robinhood. This past week, this “millennial”-leaning online broker appeared on CNBC’s Mad Money and spoke to Jim Cramer about the state of the online investing marketplace and Robinhood’s place against the backdrop of consolidation. While there were several interesting points in this discussion, co-CEO Vlad Tenev shared a list of the top 10 stocks being purchased via Robinhood in March. These included:
- American Airlines
- Carnival Corp.
- General Electric
While the trading volumes (up threefold) in March and the net deposits (up 17x compared to Q4 2019) are largely consistent with what other brokerages in the US have stated, what was perhaps the greatest insight from that interview was that Robinhood, according to Tenev, captured over 50% of new account opens at online brokerages in the US. Yes, that’s not a typo. Despite stumbles at the beginning of March with trading outages, Robinhood managed to secure more account opens than all of the major online brokerages in the US combined.
With all of the data in the US online brokerage space pointing to a phenomenally busy March and Q1, it was refreshing to see some details on the Canadian space shared from BMO InvestorLine president Silvio Stroescu in a great piece from Wealth Professional that appeared last week.
Contained in that commentary on how BMO’s wealth management team has been navigating the crisis, there were also some interesting quantitative components. For example, new account openings trended about three times higher than seasonal peaks in January and February. Daily trading volumes clocked in at two and half times higher than trends, and fund transfers were up to 10 times higher than in the past.
It wasn’t just the quantitative context that was shared either. Insights on the difference in behaviour between millennial investors and “Gen X” was also curious to see and lines up in many ways with what has been playing out in the data from the US online brokerage market. For example, millennial clients “added more cash to their accounts and bought into the market more aggressively than older peers.” In contrast, Gen X and baby boomers sold assets to build up liquidity reserves, something that was also reflected in the Schwab data.
Despite the massive economic shock taking place in countries across the globe, the data from online brokerages in both Canada and the US provides some suggestion as to why stock markets are as high as they are. Clearly there are pools of buyers, many of them younger investors, who are flooding into the stock market to take advantage of the volatility in hopes of picking up stocks that can help them boost their portfolio sizes.
Although many online brokerages have had to learn on the fly as to how to operate remotely and withstand surging demand, for the most part they have been able to do so successfully. For Canadian online brokerages in particular, if the data points from BMO InvestorLine are extended to the industry in Canada as a whole, higher commissions weren’t enough of a hurdle to dissuade many Canadian investors from making record high numbers of trades and thus generating a watershed of earnings for the Canadian discount brokerages.
Given the boost to earnings, it begs the question going forward as to where the added revenues will be deployed to next.
One hint was offered by Stroesco at the end of the piece, where he stated that “In the new context, investors will be seeking and willing to consume more financial advice in their digital travels, with a vested interest and more scrutiny on value created.”
While difficult to pin down exactly where things are going to head to next, the clear signal from across the online brokerage space is that there is a strong endorsement that there are clients still willing and excited to trade, even in the most bizarre of times.
Discount Brokerage Tweets of the Week
From the Forums
Back and Better Than Ever?
An anxious Redditor takes to the forum to pose the question of whether or not this current situation signals a “Great Depression 2.0.” A discussion weighing the current data around COVID-19 and the capital markets against past recessions ensues in this post.
In this post, a forum user unsatisfied with his money manager’s actions in the lead-up to the COVID-19 pandemic takes to the forums to ask about the possibility of “Shorting the Box.”
Into the Close
The perennial challenge to traders is that data becomes available at the “hard right edge” of the chart. Moving through the upcoming week will be an interesting proposition for DIY investors. On the one hand, the historic movements in the oil market cannot be ignored, and on the other, the stock markets are already pricing in the world moving on. These are bizarre times to be sure, but it looks like the first one returning to working as usual is the “invisible hand” of the market – let’s hope it still has enough sanitizer left to make it through the next week. Stay safe and healthy!