Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Covid-19 Pandemic Current State for UK, US, Europe, Brazil Vaccinations vs Lockdown's Third Wave - 12th Apr 21
Why These Stock Market Indicators Should Grab Your Full Attention - 12th Apr 21
Rising Debt Means a Weaker US Dollar - 12th Apr 21
Another Gold Stocks Upleg - 12th Apr 21
AMD The ZEN Tech Stock - 12th Apr 21
Overclockers UK Build Quality - Why Glue Fan to CPU Heat sink Instead of Using Supplied Clips? - 12th Apr 21 -
What are the Key Capabilities You Should Look for in Fleet Management Software? - 12th Apr 21
What Is Bitcoin Gold? - 12th Apr 21
UK Covd-19 FREE Lateral Flow Self Testing Kits How Use for the First Time at Home - 10th Apr 21
NVIDIA Stock ARMED and Dangeorus! - 10th Apr 21
The History of Bitcoin Hard Forks - 10th Apr 21
Gold Mining Stocks: A House Built on Shaky Ground - 9th Apr 21
Stock Market On the Verge of a Pullback - 9th Apr 21
What Is Bitcoin Unlimited? - 9th Apr 21
Most Money Managers Gamble With Your Money - 9th Apr 21
Top 5 Evolving Trends For Mobile Casinos - 9th Apr 21
Top 5 AI Tech Stocks Investing 2021 Analysis - 8th Apr 21
Dow Stock Market Trend Forecast 2021 - Crash or Continuing Bull Run? - 8th Apr 21
Don’t Be Fooled by the Stock Market Rally - 8th Apr 21
Gold and Latin: Twin Pillars of Western Rejuvenation - 8th Apr 21
Stronger US Dollar Reacts To Global Market Concerns – Which ETFs Will Benefit? Part II - 8th Apr 21
You're invited: Spot the Next BIG Move in Oil, Gas, Energy ETFs - 8th Apr 21
Ladies and Gentlemen, Mr US Dollar is Back - 8th Apr 21
Stock Market New S&P 500 Highs or Metals Rising? - 8th Apr 21
Microsoft AI Azure Cloud Computing Driving Tech Giant Profits - 7th Apr 21
Amazon Tech Stock PRIMEDAY SALE- 7th Apr 21
The US has Metals Problem - Lithium, Graphite, Copper, Nickel Supplies - 7th Apr 21
Yes, the Fed Will Cover Biden’s $4 Trillion Deficit - 7th Apr 21
S&P 500 Fireworks and Gold Going Stronger - 7th Apr 21
Stock Market Perceived Vs. Actual Risks: The Key To Success - 7th Apr 21
Investing in Google Deep Mind AI 2021 (Alphabet) - 6th Apr 21
Which ETFs Will Benefit As A Stronger US Dollar Reacts To Global Market Concerns - 6th Apr 21
Staying Out of the Red: Financial Tips for Kent Homeowners - 6th Apr 21
Stock Market Pushing Higher - 6th Apr 21
Inflation Fears Rise on Biden’s $3.9 TRILLION in Deficit Spending - 6th Apr 21
Editing and Rendering Videos Whilst Background Crypto Mining Bitcoins with NiceHash, Davinci Resolve - 5th Apr 21
Why the Financial Gurus Are WRONG About Gold - 5th Apr 21
Will Biden’s Infrastructure Plan Rebuild Gold? - 5th Apr 21
Stocks All Time Highs and Gold Double Bottom - 5th Apr 21
All Tech Stocks Revolve Around This Disruptor - 5th Apr 21
Silver $100 Price Ahead - 4th Apr 21
Is Astra Zeneca Vaccine Safe? Risk of Blood Clots and What Side Effects During 8 Days After Jab - 4th Apr 21
Are Premium Bonds A Good Investment in 2021 vs Savings, AI Stocks and Housing Alternatives - 4th Apr 21
Penny Stocks Hit $2 Trillion - The Real Story Behind This "Road to Riches" Scheme - 4th Apr 21
Should Stock Markets Fear Inflation or Deflation? - 4th Apr 21
Dow Stock Market Trend Forecast 2021 - 3rd Apr 21
Gold Price Just Can’t Seem to Breakout - 3rd Apr 21
Stocks, Gold and the Troubling Yields - 3rd Apr 21
What can you buy with cryptocurrencies?- 3rd Apr 21
What a Long and Not so Strange Trip it’s Been for the Gold Mining Stocks - 2nd Apr 21
WD My Book DUO 28tb Unboxing - What Drives Inside the Enclosure, Reds or Blues Review - 2nd Apr 21
Markets, Mayhem and Elliott Waves - 2nd Apr 21
Gold And US Dollar Hegemony - 2nd Apr 21
What Biden’s Big Infrastructure Push Means for Silver Price - 2nd Apr 21
Stock Market Support Near $14,358 On Transportation Index Suggests Rally Will Continue - 2nd Apr 21
Crypto Mine Bitcoin With Your Gaming PC - How Much Profit after 3 Weeks with NiceHash, RTX 3080 GPU - 2nd Apr 21
UK Lockdowns Ending As Europe Continues to Die, Sweet Child O' Mine 2021 Post Pandemic Hope - 2nd Apr 21
A Climbing USDX Means Gold Investors Should Care - 1st Apr 21
How To Spot Market Boom and Bust Cycles - 1st Apr 21
What Could Slay the Stock & Gold Bulls - 1st Apr 21
Precious Metals Mining Stocks Setting Up For A Breakout Rally – Wait For Confirmation - 1st Apr 21
Fed: “We’re Not Going to Take This Punchbowl Away” - 1st Apr 21
Mining Bitcoin On My Desktop PC For 3 Weeks - How Much Crypto Profit Using RTX 3080 on NiceHash - 31st Mar 21
INFLATION - Wage Slaves vs Gold Owners - 31st Mar 21
Why It‘s Reasonable to Be Bullish Stocks and Gold - 31st Mar 21
How To Be Eligible For An E-Transfer Payday Loan? - 31st Mar 21
eXcentral Review – Trade CFDs with a Customer-Centric Broker - 31st Mar 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

How to Insure Your Stocks Portfolio Against a Stock Market Fall

InvestorEducation / Investing 2011 Dec 23, 2010 - 06:07 AM GMT

By: Money_Morning

InvestorEducation

Best Financial Markets Analysis ArticleKeith Fitz-Gerald writes: So-called "inverse funds" are widely misunderstood and can be tricky to use, but these specialized investments have a place in most portfolios.

In fact, with U.S. stocks having zoomed more than 80% off their March 2009 market lows, now could be the ideal time to add inverse exchange-traded funds to your portfolio.


But there's definitely a right way and a wrong way to use them.

So it's worth taking a closer look.

The Lowdown on Inverse ETFs
If you're not familiar with inverse exchange-traded funds (ETFs) - or haven't used them, yet - don't worry. You're not alone. Despite the fact that they've been around a few years, I've found that many investors either aren't aware of them, or don't quite understand how they can be used.

Others who are familiar with inverse ETFs view them solely as a hedging instrument - and don't realize that their strategic use can lead to higher, more-consistent returns over time.

That's ironic, because they've proven their worth, time and again - such as during the run-up in oil prices that we saw in 2005 and 2006, and during the financial crisis that got its start in late 2007.

As their name implies, an inverse ETF is a specialized investment vehicle that moves opposite whatever security or index they're designed to track.

Inverse ETFs trade just like stocks on regular exchanges, which means that investors who want to use them don't have to have special accounts or approval from their brokers. And because they are priced in "real time" - just like regular stocks (and as opposed to conventional mutual funds) - investors who want to really fine tune their approach can literally monitor their exposure down to the minute or the tick if they wish.

Inverse funds can utilize a variety or combination of financial instruments - including options and futures - to achieve their objectives. And yet, their operation is almost completely invisible to the investor. That makes ETFs ideal for counter-balancing long positions in a diversified portfolio without having to worry about the intricacies of short selling, put options, liquidity, taxes or margin management.

Inverse funds also remove the element of market timing from the equation. And that's a very good thing, since the vast majority of investors - individual and professional alike - fail to keep pace with the market averages. In fact, in any given year, about three-quarters of all professional managers lag the performance of the Standard & Poor's 500 Index.

Rydex/SGI created one of the first inverse funds: The Rydex Inverse S&P 500 Strategy Inverse Fund (RYURX). In professional trading circles, it was known as the Rydex URSA, or simply "ursa," which is Latin for "bear."

Today, as part of a $1 trillion industry segment, there are more than 100 inverse funds tracking the S&P 500, the Nasdaq Composite Index, the Dow Jones Industrial Average, as well as all sorts of other indices ranging from domestic small caps to foreign choices like the iShares FTSE/Xinhua China 25 Index (NYSE: FXI).

There are even so-called "ultra" inverse funds, which offer double or even triple the inverse results if you want to be more aggressive. These come with their own unique wrinkles because they use leverage to achieve their objectives. But don't necessarily believe all the bad press they've received in recent years. If used properly, they're hardly the "return killers" pundits would have you believe.

I like to use inverse funds in two ways:

•As an "income stabilizer."
•And as an "absolute-return producer."
Let's take a look at both.

Inverse Funds as an Income Stabilizer ...
If you've ever been sailing and hit rough water, you might be familiar with something called a "storm anchor." It's something that's thrown overboard in an effort to stabilize the boat.
That's a great analogy. Because inverse funds are truly non-correlated assets, they serve the same purpose as a storm anchor. So if you're dependent on income, using inverse funds can stabilize the principal value of your holdings, while allowing you to concentrate on preserving your income.
This is more of a "set-it-and-forget-it" approach to income investing. And research studies underscore that having 5% to 10% of your overall assets in such holdings is just about right.

... And as an Absolute-Return Producer
If you're more aggressive, you can use inverse funds to achieve absolute returns (a.k.a. profits) during rough market stretches in which everyone else around you is fretting about the losses they're incurring

Investors who travel this route typically allocate more than 5% to 10% of their portfolios in inverse-type investments - depending upon what it is that they're trying to hedge.

Investors in this group also tend to rebalance their inverse funds regularly - sometimes even daily - to accommodate the market's inevitable ebbs and flows (See related graphic).

Consider, for example, a $10,000 investment that outperforms the markets by 5%. An investor who uses inverse funds to hedge that investment would now want to add an additional $500 to an appropriate inverse fund to rebalance the incremental return (or "alpha," as it's referred to by professional investors).

Similarly, if a hedged investment has fallen by 5%, that same investor would want to sell $500 worth of inverse funds to reduce the net exposure to zero ($0.00).

A Worthwhile Sacrifice
In investing, as in physics, there is no "free lunch." In other words, in order to get the security that these inverse funds provide, you have to give up something.

Because inverse funds move in the opposite direction to the underlying indices they track, they'll take a little off the top when markets are rising.

However, in a world characterized by out-of-control government spending and markets that are exposed to the risks created by seriously out-of-control financial institutions, that's an acceptable trade-off. Especially when it comes to the peace of mind I get by using them.

Actions to Take: Although they are specialized investments, I believe "inverse funds" have a place in most portfolios.

Here are a few of my favorite choices to help you get started.

If you're partial to U.S. stocks, consider the afore-mentioned Rydex Inverse S&P 500 Strategy Inverse Fund (RYURX). It moves opposite the S&P 500 Index.

If you've got heavy U.S. Treasury exposure - particularly at the longer end of the spectrum as many investors do right now - consider the Rydex Inverse Government Long Bond Strategy Inverse Fund (RYJUX) or even the iPath U.S. Treasury Long Bond Bear ETN (DLBS). Although the latter is technically an exchange-traded note (ETN), the purpose and function is similar.

If you're an investor who favors high tech, or who is big into energy, there's the ProShares Short QQQ ETF (NYSE: PSQ) or the United States Short Oil Fund (NYSE: DNO).

If you find that you share one of my major worries, and are concerned about the outlook for the U.S. dollar, or if you have the majority of your portfolio in dollar-denominated investments, you might find that the PowerShares DB U.S. Dollar Index Bearish (NYSE: UDN) will provide the security that eases those fears.

Finally, if you share my view that China represents the greatest long-term investment potential on the planet - but you still wish to "smooth out" some of the interim volatility that's certain to come - consider the Ultrashort FTSE/Xinhua China Proshares ETF (NYSE: FXP). This is kind of the yin to the yang of the afore-mentioned iShares FTSE/Xinhua China 25 Index ETF (NYSE: FXI).

[Editor's Note: Money Morning's Keith Fitz-Gerald clearly understands Wall Street's tricks, and knows how to exploit them for profit. He also has an unrivaled understanding of global markets that stems from two decades' worth of boots-on-the-ground involvement with key markets in Asia. In his Geiger Index advisory service, Fitz-Gerald brings all of his experience and insights to bear for subscribers. His scorching track record speaks for itself. To learn more about Geiger, please click here.]

Source : http://moneymorning.com/2010/12/23/investment-strategies-for-2011-the-right-way-to-use-inverse-funds/

Money Morning/The Money Map Report

©2010 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 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

6 Critical Money Making Rules