ETF, On the rocks – with a twist…

There was an ETF recently launched based on whiskey prices. This alone may or may not be deemed as a truly newsworthy event, but with an affinity for Single Malt Scotch Whiskey (Islay region to be specific), it certainly got my attention. The obvious discussions can be about; is the make-up of the ETF broad enough to truly cover an entire industry and is the ETF issuer backed well enough to guarantee both liquidity and long term viability? There are of course many other similar questions that can and should be asked about a great number of ETF’s, particularly the more esoteric ones, like whiskey prices.

I do think ETF’s have a place, so this is not a statement on their validity, but merely a statement on the obscure nature of some of them and their place as financial securities. I believe the long time justification has been that they can give the general investor access to specialized instruments that attempt to track entire industries or specific indices. And in the age of cheap trading they have certainly added to overall liquidity. Heck, one like this is even FUN!

The other instruments that are traded with reasonable liquidity in multiple places are binary options, i.e. you’re right or you’re wrong. These can even be single day or week bets, oops…I mean investments. And in Las Vegas there are plenty of places to wager on other events. What I’m not sure about anymore is really how these lines are drawn. I can ‘wager’ on the future price of Whiskey, but wagering on sporting events is made much less accessible to the general population, legally anyway. I can ‘wager’ on the close of the S&P Index, or even the weather via exchange products, but not how much the unemployment rate will go up or down next month.

Many would argue that sports gambling is regulated the way it is to avoid game fixing. For the most part, this works. Like anything else there are exceptions; the Black Sox, Boston College Basketball, Tim Donaghy (ex-NBA basketball ref), and a handful of other publicized occurrences. But when you read about John Stumpf, the now former CEO of Wells Fargo who resigned due to a policy of opening phantom client accounts to show the company meeting metrics, I would say price fixing and influence is being exercised in the financial markets as well. The value of a CEO’s bonus granted options are tied to stock price. Meeting your target metrics always pleases the fundamental analysts, which in turn should lead to higher stock prices. There is an inherent desire to make the price go up. Just like my inherent desire to see the New York Giants win the Super Bowl, which is only open to legal gambling in Las Vegas, not via an E*TRADE account.

Currently, we have what would probably be the largest betting pool item in history; the US Presidential election in a mere 20 days. I can’t imagine with the polls having spent so much time within the margin of error that people would not have enough interest to wager. There was a website that for a few years did facilitate this. It was called and was billed as a “prediction market.” It was definitely that. In the 2008 election, the predictions were within 1 electoral vote of President Obama’s returns. And I miss that accuracy. Intrade was shut as a result of both government action and financial ‘issues.’

What we currently have are polls to predict. But this is even more imperfect than usual. Polls suffer from many inherent flaws; question bias, sample size, etc., which can all lead to results skewed to the author’s intent, be it intentional or not. In this election, we have access to more information and faster than at any time in history. It should be easier to decide on this than it has ever been. Certainly we’ve got more information at our fingertips than we do on the supply chain of Apple products.

Yet we now have an election where discussion or dare I say debate, let alone declaration of a position on which candidate we support does not seem to be taking place in any public manner.  Taken a drive recently? Walked around your neighborhood? I find the lowest numbers of bumper stickers and lawn signs for Presidential nominees that I have ever seen (unscientific, I know).

It’s easy to understand this phenomenon, this election is between the two least liked candidates in history. And this is why I miss Intrade. If I want to bet on the direction of whiskey, I definitely want to bet on this, but in a financial sense, not in Las Vegas. Both whiskey and the election are important to me (depending on election outcome, whiskey may move up), but the excitement of the election is more akin to weekly fantasy football from FanDuel or DraftKings than it is to a season long fantasy league where you know after week 9 you have no chance. So we’re back to the line in the sand. Back to the problem of ‘influence’ in sports betting.

For me, there is less chance of a truly rigged election than there is of a rigged football game, or a rigged company balance sheet. There is certainly enough interest for adequate liquidity. There is an easy way to measure being correct (Intrade used a 1 to 100 scale to effectively show percent probability). We have lots of elections and we have many other real time scenarios that people would wager on, fixable or not. Music and film awards (fixable) or number of new generation iPhones sold on release date (less fixable). In fact, the iPhone prediction market would actually open up investing in Apple on a short term basis that could be less expensive and therefore more accessible to the average citizen.

Will we ever really be able to legally make financial security level investments in these short term events? The way things are going, I’m guessing probably. File it under the handling of OTC contracts within Dodd-Frank. When you look at it, there’s not a big difference between an opinion on the price of oil in November and the winner of an election in November. And the similarities of the election and the legal financial markets just continue from there. The election is really an investment, just like a whiskey ETF, but even more important. So we should all invest in those Futures, even if you can’t do it with money.

One thought on “ETF, On the rocks – with a twist…

  1. There may be a winner in this election but either way it’s looking like the people lose. I’d load up on that Whiskey ETF. Either the election goes a lot of people are going to need a good stiff drink!


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