There seems to be an exchange traded product for everything these days and another exotic pair of products hit the market recently. Noted investor Dennis Gartman teamed up with MBF Asset Management founder Mark Fisher to introduce a pair of exchange traded notes with ticker symbols, ONN and OFF.
Technically, these are exchange traded notes but since they function in the same way as exchange traded funds, I’ll leave it to you to research the difference between the two before committing any money to the names.
In modern investing markets, the terms, “Risk Off” and “Risk On” trading have become commonplace on trading floors around the world. Risk on trading takes place when investors have an optimistic view of the economy and feel ok with committing funds to more risky assets like highly volatile (often called high beta or high multiple) stocks because they know that as the market rises, these stocks will likely outperform the index.
Risk off trading is the opposite. When investors feel bearish or have little confidence in the economy and feel the need to protect their money rather than try to make big gains, they are said to be risk on trading. Risk off trading will be evident by large inflows in to the bond market, particularly treasuries and investment grade bonds. For those who don’t trade in the bond markets, risk off would include stocks with little volatility like large cap healthcare and utility stocks that pay a healthy dividend.
In the past risk off and risk on trading could only take place by moving around large amounts of assets. That costs a lot of money in commissions and with the VIX above 30, the market is wildly swinging between risk off and risk on environments.
These two exchange traded notes attempt to solve the problems inherent with risk off and risk on trading. The ETRACS Fisher-Gartman Risk On ETN (ONN) will rise in value when the outlook for the markets and the economy are positive and it should fall when the outlook becomes negative.
The ETRACS Fisher-Gartman Risk Off ETN (OFF) will perform inversely. It will rise when the market sentiment is negative and fall when it looks more optimistic.
Should I Dive In?
If you have experience as a risk off and risk on trader, these new ETNs may be appropriate for you but if you aren’t a short term trader or don’t trade with risk appetites as a major focus, these products probably aren’t suited for you. Remember that exchange traded funds and notes are tools and not every trader needs every tool.
Because these products are new, it’s important to watch how they react to economic events before investing. Every trader knows that stocks and ETFs have personalities of their own and before you commit real money, you should understand the personality. We may have a good idea of how these products are supposed to work but until we see them in action, it’s best to either stay away or even better, trade them in a paper or virtual account where no real money is committed.
{ 2 comments… read them below or add one }
I must disagree with your characterization of risk on and risk off. In your article you claim that:
“Risk off trading takes place when investors have an optimistic view of the economy and feel ok with committing funds to more risky assets like highly volatile (often called high beta or high multiple) stocks…”
In fact risk off trading is just the opposite. When taking risk off, one avoids risk by shedding high risk assets in favor of low beta stocks and treasuries. You also make the same mistake inversely with your description of risk on. I’m sure this is just a transposition error on your part, but it should really be corrected nonetheless.
Glenn
Thanks for commenting. You’re right and I updated the post. Thanks for catching my transposition error.
Tim