Beware Reversion In YieldShares High Income ETF And ETRACS 2x Closed-End Fund ETN

In a previous article, we investigated the unusual high-volume buying and selling of CEFs on the final few trading days of 2014. I hypothesized that this trading activity was related to the annual rebalancing of the ISE High Income Index [YLDA], which is the index tracked by the YieldShares High Income ETF (NYSEARCA: YYY), a CEF "fund-of-funds", and the ETRACS Monthly Pay 2xLeveraged Closed-End Fund ETN (NYSEARCA: CEFL), the 2X leveraged version of YYY.According to YYY's prospectus, the constituent changes are made after the close of the last trading day in December and effective at the opening of the next trading day. On 12/24/2014, ISE gave notice of the proposed changes that it planned to make to the index one week later.Interestingly, we observed that CEFs to be added to the index saw increases in price, indicative of high-volume buying, while CEFs that were to be removed from the index saw declines in price, indicative of high-volume selling. Moreover, we observed an upwards price spike for the CEFs to be added at the close of 12/31/2014, and a downwards price spike for the CEFs to be removed. One day later, on 1/2/2015, we observed that YYY fell 1.25% (and CEFL fell 2.06%) on a day where stocks, bonds and the PowerShares CEF Income Composite Portfolio ETF (NYSEARCA: PCEF), another CEF fund-of-funds that tracks a different index, held relatively flat.My explanation for these strange events was that the "smart money" knew that YYY and CEFL* had... Read more