I don’t usually drink on a Monday afternoon, but yesterday, I made an exception. Once the market had closed, I snuck out of the office for a cold beer (a Shiner Bock, of course). And then I ordered a second one. It had been that kind of day.
But here’s the thing: while wild market volatility is nerve wracking, these are the days when the best opportunities present themselves. I’m not exaggerating when I say that I made 30% in about 15 minutes yesterday, and I did so while taking no risk whatsoever.
I got lucky. I happened to stumble into a mispriced security, and I struck while the iron was hot.
Let me give you the details. I opened my trading screen to find that an ETF I owned, the Cambria Shareholder Yield ETF (NYSEARCA: SYLD) had dropped by 50% in value. It had lost half its value from Friday’s close. This is what I saw:
Remember, ETFs are not stocks. They are exchange-traded mutual funds that, by their very construction, are supposed to follow an index. At least in theory. If they didn’t, large institutional investors could buy up a large block of ETF shares, break them apart into their portfolio holdings, and then sell the portfolio holdings in the open market for a risk-free profit.
In the case of SYLD, we had a mispricing that was theoretically impossible. The ETF’s price was down by 50%… while the actual portfolio of stocks that SYLD tracks were down maybe 4% at most.
But on a trading day like yesterday, you don’t have a normal, functioning market. You get mispricings like these. (SYLD wasn’t the only ETF whose pricing became untethered from reality. It’s just the only one I happened to be trading at the time.)
So, I did what any rational investor would do: I plowed every dollar I could find into SYLD shares before the mispricing window closed. I made about 30% in 15 minutes, sold the shares and went on about my day.
I tell this story not to toot my own horn. I’m the first to admit that I got phenomenally lucky here. But there are definitely some lessons we can learn from this:
- To start, ETFs are illiquid, and have low trading volume. You can’t dump a bunch of shares without affecting its price. So when a large shareholder unloads his or her shares in a hurry, especially on a smaller ETF like SYLD that typically trades less than 30,000 shares per day, it startles the market. Thus, you get big mispricings like we saw yesterday.
- But this same illiquidity can create fantastic short-term opportunities if you’re willing to take the other side of the trade and you are small and nimble enough to act. If I had been running a multi-billion-dollar hedge fund, I wouldn’t have been able to make this trade. Given the small size of the ETF, I would have moved the market, destroying the opportunity I was hoping to exploit.
- I was also able to jump on this because I wasn’t fully invested. I had a little dry powder… just in case. In order to take advantage of opportunities like these, you need to keep a little cash on hand.
Keep your eyes open. We’ll have more volatility in the months to come… and plenty of good short-term opportunities.
Editor, Dent 401k Advisor
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