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Hedging oil ETF using Airlines ETF

Posted: August 20th, 2018, 11:06 pm
by quantobe

I am not actually a trader, but I've recently started to become curious about doing some trading as an individual with my own money. I've come across ETF and have read about how they can be a -relatively- safer vehicle for trading, for beginners. Of course I don't want to just take a naked position in some ETF and just speculate and perhaps lose money, so I started to look for how I can use some other ETFs or trades to hedge my hypothetical ETF position. I was looking into some Oil ETFs and then I thought, well to hedge that I perhaps need to find an Airline industry ETF, as if one goes up you'd expect the other one to go down. then I compared these two guys to see how they've done in the past year:

CRAK - VanEck Vct Oil Shs
XTN - SPDR S&P Trns Shs

and surprisingly I see that they've both somewhat have gained. Why is that?
I then found out that I can find some inverse commodity (oil) ETFs which probably would do a much better job of hedging oil ETF, but then again, if I gain in one the other one will lose (as expected), so it will wipe out the gain of the first one. If I were an IB trader I'd use options but as an individual trader that's not so easy, so id there a point in hedging like what I explained? How should I go about hedging ETFs?


Re: Hedging oil ETF using Airlines ETF

Posted: August 22nd, 2018, 9:13 am
by ppauper
you need to construct a multi-factor model for the airline industry. Yes, an increase in the price of oil wll hurt airline stocks, but the economy is booming under president trump so more people are flying hence airlines make more money.

Re: Hedging oil ETF using Airlines ETF

Posted: August 22nd, 2018, 6:44 pm
by Hansi
Why do you want to do this? What's the rational/strategy?

This is not what a novice personal account trade normally contains, that's more about just buying diversified large, cheap ETFs with a specific strategic asset allocation in mind. If you want a perfectly hedged position capping all up and down side maybe just hold cash or equivalents?

Re: Hedging oil ETF using Airlines ETF

Posted: August 24th, 2018, 9:14 am
by figaro
Airlines tend to hedge their fuel exposure, so the correlation will typically be quite low.

To second order, high oil prices mean high inflation, and that has all sorts of knock-on effects.

Also, hedging-a-commodity-with-a-commodity-linked-industry is the wrong direction. Like taking long term deposits to lend short term. Equities aim to outperform the underlying commodity, not underperform it. So if you are seriously looking to hedge something, you should be looking in the opposite direction. Long equty, short commodity.

Finally, depends on the ETF, but shorting illiquid ETFs can be expensive. Really expensive. Like 30-40% per year in borrowing costs. There is no way to make money from that.

Re: Hedging oil ETF using Airlines ETF

Posted: August 25th, 2018, 4:51 pm
by quantobe
Thanks for all the answers.