Portfolio Protection With Leveraged ETFs (WMT, TRV, VZ, DXD, SDS, QID, SKF, FAZ, DTO, DUG, EUO)
Even well diversified long-only portfolios can take a beating in volatile markets, and a number of investors would be a lot richer now if they started adding some short exposure as the benchmarks soared to record highs prior to the recession. Shorting individual stocks can often be too risky for individual investors, but thanks to the proliferation of exchange-traded funds (ETFs), hedging long positions with bets against a benchmark is now easier than ever, and no margin account is required.
On Friday the Dow is sold off by triple-digits, and even top performers Wal-Mart Stores (WMT), The Travelers Companies (TRV), and Verizon Communications (VZ) were in negative territory in early trading. Investors familiar with components of the Leveraged ETFs Index know that there are a number of ways to profit from the losses of the Dow and other benchmarks without selling short. The UltraShort Dow30 ProShares (DXD), UltraShort S&P500 ProShares (SDS), and UltraShort QQQ ProShares (QID) are designed to track double the inverse of the Dow 30, S&P 500, and Nasdaq 100 indices, and all three are ahead by more than 3% for the session.
Investors with heavy long exposure to a particular equity segment have leveraged ETF options to hedge against those bets as well. Rather than dumping multiple financial stocks, and racking up big commission expenses in times of short-term volatility, traders can add some exposure to the UltraShort Financials ProShares (SKF) or Direxion Shares ETF Trust Financial Bear 3x (FAZ), although the latter is a 3x ETF that is recommended for day trading purposes only. The same hedging strategy can be implemented for a number of other sectors as well.
While hedging against long exposure is one way to utilize leveraged ETFs, a number of investors use them strictly for profits as well. A look at the Index’s one-month performance sort shows that the PowerShares DB Crude Oil Double Short (DTO) and UltraShort Oil & Gas ProShares (DUG) have both gained more than 20% over the last month. Meanwhile, investors who bet against the euro via the ProShares UltraShort Euro (EUO) last month are now ahead by 15%.
Investors can track the the Leveraged ETFs Index for performance trends and a suite of other metrics at tickerspy.com.
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