Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Alternative ETFs, Hedge Funds For the Little Guy

Companies / Exchange Traded Funds Feb 11, 2010 - 08:58 AM GMT

By: Ron_Rowland

Companies

Best Financial Markets Analysis ArticleWhether you’re investing in stock exchange traded funds (ETFs), bond ETFs, commodity ETFs, currency ETFs, international ETFs, or even inverse ETFs, you’re stuck with one big problem: Any way you look at it, you are making a one-sided bet on the future direction of a specific market segment.

Of course, if your timing is right, you can make a lot of money with these bets. If your timing is wrong, you stand to lose.


Well, here’s some good news: Now there are ETFs that don’t force you to bet long or short. Some take a blended approach that combines both bullish and bearish market positions, while others bypass the question entirely and try to make money in other ways.

With alternative strategy ETFs, you don't have to take sides.
With alternative strategy ETFs, you don’t have to take sides.

Today I’ll tell you about some of these special ETFs and why they might be just what the doctor ordered for these crazy markets …

Hedge Funds for The Little Guy

You’ve probably heard about hedge funds, those super-secretive private pools where millionaires stash their money. Yes, sometimes they blow up. But many hedge funds have a long history of good returns in all market conditions. They do this by combining sophisticated trading techniques with long and short positions in various markets.

The problem is that the best hedge funds aren’t available to everyday investors in small amounts. I can’t change that for you. But I can point you to some ETFs that try to use similar strategies.

“Alternative” is the name often used with this category of ETFs because they typically do not take a “traditional” approach to stock, bond, and commodity investing. And if you start looking into this category of ETFs, you’ll soon run into the cryptic-sounding term “130/30.” This refers to a portfolio tool that involves using leverage to combine a 130 percent long position with a 30 percent short position.

130/30 works like this: Say you have $1 million to invest. You borrow another $300,000 and invest $1.3 million in stocks you think will go up. At the same time, you enter a short sale of $300,000 in stocks you think will go down.

In this scenario your net position is 100 percent long — but if you pick the right stocks, your longs will go up and your shorts will go down. You’ll make money on both sides of the market. This is a simple variation of what many hedge funds do (with far greater leverage in some cases).

Two ETFs attempt to implement this sort of program for you — choosing the stocks to buy and short and giving it to you in one neat package:

  • ProShares Credit Suisse 130/30 (CSM)
  • First Trust Enhanced 130/30 (JFT)

So far their track record is mixed. But this category of ETFs hasn’t been around long enough to make a firm judgment yet.

Hedge Fund Replication: Beyond 130/30

Of course, 130/30 isn’t the only hedge fund-like ETF category. There’s another group of ETFs that uses a variety of strategies like long/short, global macro, merger arbitrage, and more. Some are even referred to as “hedge fund replication ETFs.”

Like the 130/30 ETFs mentioned earlier, most of these ETFs are too new to have developed a track record and trading is often spotty. These may catch on with investors over time, but for now I would suggest that you only window shop — it’s nice to see what’s out there, but maybe not a good idea to plunk down your hard-earned cash just yet.

Here are some ETFs to look at if you want to get a better understanding of this category:

  • iShares Diversified Alternative Trust (ALT)
  • IQ Hedge Macro Tracker (MCRO)
  • IQ Hedge Multi-Strategy Tracker (QAI)
  • IQ ARB Merger Arbitrage (MNA)
  • IQ CPI Inflation Hedged (CPI)

Earn Option Income with Buy/Write ETFs

You might be familiar with an investment technique known as “covered call writing.” Sounds fancy but it’s really quite simple. You just buy a stock and then sell an equivalent amount of call options against it. So what happens next?

Three possibilities:

First, if the stock goes up and stays there until your options expire, your shares will be “called” away from you at the prearranged strike price you picked. So in effect, you’ll be forced to sell at a profit. Maybe the stock will go up even more after you sell it. But no one ever went broke by grabbing a gain.

Second, the stock could go down, and you’ll keep it or sell it at a loss. But your loss will be reduced by the amount of the income you received from selling options that expire worthless.

Selling options can put extra cash in your pocket.
Selling options can put extra cash in your pocket.

Third, the stock could go sideways. Then you have neither profit nor loss on your shares, but you’ll get to keep the option-selling income. And you’ll still have your stock and can do the same thing all over again!

This strategy, also known as “Buy/Write,” is great for income-seeking investors who don’t want to desert the stock market completely. It’s also tailor-made for range-bound, choppy market conditions.

Here are some ETFs and ETNs (exchange traded notes) that apply the covered call technique to the S&P 500 and Nasdaq 100 Indexes:

  • PowerShares S&P 500 Buy/Write (PBP)
  • iPath CBOE S&P 500 Buy/Write ETN (BWV)
  • PowerShares Nasdaq 100 Buy/Write (PQBW)

Make Money from Market Volatility with VIX ETNs

When people say the market is “volatile” they usually mean “It’s going down!” However, volatility really means movement — in either direction. A volatile market is one that is likely to make a big move in the near future. Whether that move will be up or down is a different question.

Volatility means movement up or down.
Volatility means movement up or down.

Volatility is very important to futures and options traders. That’s why they developed ways to measure it, including the Volatility Index, or VIX. The VIX is a metric that expresses the amount people are willing to pay for call and put options on the S&P 500.

In practice, the VIX is a kind of “fear gauge” for the stock market. It tends to be low when investors are optimistic about stocks, and tends to surge higher when they are overwhelmed with fear. Extremes at either end can be a good, contrarian market timing indicator.

Barclays, under the iPath brand name, offers a pair of ETNs that attempt to track VIX futures for either the short-term or medium-term. Here are the names and tickers:

  • iPath S&P 500 VIX Short-Term Futures ETN (VXX)
  • iPath S&P 500 VIX Mid-Term Futures ETN (VXZ)

Keep in mind that ETNs have some unique characteristics that make them riskier than ETFs in certain ways. Nonetheless, they can be very useful tools. Most important though is that these ETNs can go up when the stock market is falling. That’s a nice capability to have in today’s wacky market.

Best wishes,

Ron

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in