ETFdb Logo
ETFdb Logo
  • ETF Database
  • Channels
    • Themes
      • Active ETF
      • Artificial Intelligence
      • Beyond Basic Beta
      • China Insights
      • Climate Insights
      • Core Strategies
      • Crypto
      • Disruptive Technology
      • Energy Infrastructure
      • ETF Building Blocks
      • ETF Investing
      • ETF Education
      • ETF Strategist
      • Financial Literacy
      • Fixed Income
      • Free Cash Flow
      • Innovative ETFs
      • Institutional Income Strategies
      • Leveraged & Inverse
      • Managed Futures
      • Market Insights
      • Modern Alpha
      • Responsible Investing
      • Retirement Income
      • Tax Efficient Income
    • Asset Class
      • Equity
        • U.S. Equity
        • Int'l Developed
        • Emerging Market Equities
      • Alternatives
        • Commodities
        • Gold/Silver/Critical Minerals
        • Currency
        • Volatility
      • Fixed Income
        • Investment Grade Corporates
        • US Treasuries & TIPS
        • High Yield Corporates
        • Int'l Fixed Income
    • ETF Ecosystem
    • ETFs in Canada
    • Market Outlook Channel
  • Tools
    • ETF Screener
    • ETF Country Exposure Tool
    • ETF Sector Tracker Tool
    • ETF Database Categories
    • Head-To-Head ETF Comparison Tool
    • ETF Stock Exposure Tool
    • ETF Issuer Fund Flows
    • Indexes
    • Mutual Fund To ETF Converter
  • Research
    • ETF Education
    • Equity Investing
    • Dividend ETFs
    • Leveraged ETFs
    • Inverse ETFs
    • Index Education
    • Index Insights
    • Top ETF Sectors
    • Top ETF Issuers
    • Top ETF Industries
  • Webcasts
  • Themes
    • AI ETFs
    • Blockchain ETFs
    • See all Thematic Investing ETF themes
    • ESG Investing
    • Marijuana ETFs
  • Multimedia
    • ETF 360 Video Series
    • ETF of the Week Podcast
    • ETF Prime Podcast
    • Video
  • Company
    • About VettaFi
    • Get VettaFi’ed
  • PRO
    • Pro Content
    • Pro Tools
    • Advanced
    • FAQ
    • Pricing
    • Free Sign Up
    • Login
  1. ETF Trading Strategies
  2. How to Lose $800 Million with ETFs
ETF Trading Strategies
Share

How to Lose $800 Million with ETFs

Jared CummansJun 24, 2015
2015-06-24

Over the years there have been a number of complaints about investors losing money using ETFs; the vast majority of complaints stem from those who did not fully understand the product or had no business buying in the first place (see leveraged ETFs). But every once in a while an ETF and its underlying asset endure a sharp correction, leaving someone on the losing end of a very large trade.

That is exactly what happened over a period stretching from 2012 to 2013, as a high profile investor watched his position take a nosedive.

John Paulson and the $3 Billion Bet

From 2000 to 2011, gold made an historic run as the commodity entered a relentless bull market that saw it peak at more than $1,900/oz. Since its inception in 2004, the SPDR Gold Trust (GLD A-) has been a major beneficiary of that trend and has only had one negative annual return (2013).

Given its handsome returns prior to gold’s correction, GLD established itself not only as one of the most popular ETFs, but also as one of the most popular securities available on the market. During this time, the fund caught the eyes of major hedge funds and high profile investors such as George Soros and John Paulson. But it was Paulson who was left on the receiving end of GLD’s collapse.

At the end of Q2 2012, Paulson revealed that he owned 21.8 million shares of GLD. At a price of approximately $151.05, that investment was worth $3.29 billion, an astounding 44% of his equity assets; a definite no-no as far as diversification standards are concerned.

The fund would make a run high over the next few weeks, peaking at $173.61, a jump of 14.94%, and creating unrealized gains of $491 million. Not too shabby for a few weeks’ work. But the ETF would start on a downtrend for the remainder of the year, carrying through Q1 2013, as the chart below displays [see also Free Lunch on Wall Street: 21 Ways Investors Can Make (and Keep) More Money].


Content continues below advertisement

GLD Line Chart with annotations
  • 1. Paulson holds 21.8 million shares of GLD: At the end of Q2 2012, Paulson had 44% of his equity assets tied to GLD (6/29/2012).
  • 2. Gold Massive Sell-off: FOMC minutes suggested an early end to QE, combined with breaking support gold plummeted 13% in just two trading sessions (4/11/2013).
  • 3. Paulson down $786 Million: From the end of Q2 2012 to the low in GLD, Paulson was facing unrealized losses of $786 million (6/27/2013).
  • 4. Paulson Halves GLD Position: Paulson revealed that he sold 11.57 million shares of GLD over the previous quarter (7/1/2013).

Then came the correction. At point 2 on the timeline above (4/11/2013) FOMC minutes suggested an early end to QE and combined with gold breaking a key support level to send the precious metal down 13% in just two trading sessions.

Though GLD bounced back during the following few days, it cratered yet again, hitting a low point at the end of Q2 2013. At that point, GLD was sitting at $119.11 and Paulson was staring at unrealized losses of nearly $800 million. He also revealed that over the previous quarter he sold 11.57 million shares of GLD, cutting his position virtually in half.

A Lesson in Portfolio Management

For someone like Paulson this bet was an attempt to outperform the market for his hedge fund’s purposes; it would be an extremely risky and often foolish choice for an individual investor to make. The stats vary, but somewhere between 60% and 80% of active managers fail to beat their underlying index each year. Investors should keep in mind that simply keeping up with the markets is a perfectly effective strategy over the long haul [see also 101 ETF Lessons Every Financial Advisor Should Learn].

The Bottom Line

Rather than spending more effort and energy on trying to beat the market (something that professionals fail to do more often than not), investors should focus on a solid, diversified strategy for their objectives and time horizon. A bit of a gamble now and again is certainly fine, but if you have nearly half of your assets in something as volatile as a commodity (or worse, a leveraged fund) it may be time to re-think your strategy before you get burned. There is nothing wrong with a conventionally “boring” or plain portfolio. In the long run, it will suit you better and will often outperform those trying to find alpha.

Follow me on Twitter @JaredCummans.

[For more ETF analysis, make sure to sign up for our free ETF newsletter]

Disclosure: No positions at time of writing.

» Popular Pages

  • Tickers
  • Articles

Dec 01

Main Management Market Note: December 1, 2023

Dec 01

When Tax-Loss Harvesting Bonds, Don’t Overlook BNDI

Dec 01

S&P 500 Snapshot: Highest Close of the Year

Dec 01

This Week in ETFs: Private Equity Fund Debuts

Dec 01

VettaFi Voices On: The 2023 Holiday Retail Season

Dec 01

Invesco’s 4 Most Popular Fixed Income ETFs in November

Dec 01

Advisors Consistently Seek Broad Tech Exposures

Dec 01

Treasury Yields: A Long-Term Perspective: November 2023

Dec 01

Active ETF TCAF Nearing Half a Billion in AUM

Dec 01

Diversified Carbon Exposure Enhances Risk/Return Fundamentals

QQQ

Invesco QQQ Trust Series I

SPY

SPDR S&P 500 ETF Trust

VOO

Vanguard S&P 500 ETF

XLK

Technology Select Sector SPDR...

VGT

Vanguard Information...

IYW

iShares U.S. Technology ETF

SMH

VanEck Semiconductor ETF

VTI

Vanguard Total Stock Market...

IVV

iShares Core S&P 500 ETF

SCHD

Schwab US Dividend Equity ETF...

Loading Articles...
Our Sites
  • VettaFi
  • Advisor Perspectives
  • ETF Trends
Tools
  • ETF Screener
  • Mutual Fund to ETF Converter
  • Head-To-Head ETF Comparison
  • ETF Country Exposure Tool
  • ETF Stock Exposure Tool
  • ETF Database Pro
More Tools
  • Financial Advisor & RIA Center
Explore ETFs
  • ETF News
  • ETF Category Reports
  • Premium Articles
  • Alphabetical Listing of ETFs
  • Browse ETFs by ETF Database Category
  • Browse ETFs by Index
  • Browse ETFs by Issuer
  • Compare ETFs
Information
  • Contact Us
  • Terms of Use and Privacy Policy
  • © 2023 VettaFi LLC. All rights reserved.

Advertisement

Is Your Portfolio Positioned With Enough Global Exposure?

ETF Education Channel

How to Allocate Commodities in Portfolios

Tom LydonApr 26, 2022
2022-04-26

A long-running debate in asset allocation circles is how much of a portfolio an investor should...

Core Strategies Channel

Why ETFs Experience Limit Up/Down Protections

Karrie GordonMay 13, 2022
2022-05-13

In a digital age where information moves in milliseconds and millions of participants can transact...

}
X