Serious economic storm clouds have emerged, and when you
consider that the S&P 500 is on track for its fourth straight
year of gains, a tumble in 2013 is downright plausible. Here's a
sage piece of advice: If you own high-quality companies that appear
to sport low valuations, hang on to them. It would be unwise to
dump them just because you feel that "stocks are too risky" right
Instead, provide some protection for your portfolio through a
select group of exchange-traded funds (
). These funds provide you with ahedge against broadermarket
pullbacks and can even let you target certain parts of the market
that appear especially vulnerable.
The "flight to quality " example
When the market starts to wobble, many investors act predictably.
They sell stocks of smaller companies while holding on to theirblue
chip , large-cap stocks in a move known as a "flight to quality."
In such times, you might protect yourself against any broader
pressure that the exodus from small caps may bring by buyingshares
Direxion Daily Small CapBear 3X (
. ThisETF actually moves in the opposite direction of the Russell
2000 -- a keyproxy for small-cap stocks -- and it moves at three
times the rate. For example, if the Russell 2000 fell by 5%, then
this fund would gain 15%. This fund trades nearly 20 million shares
a day, which means many investors now see it as a key arrow in
their quiver ofinvestment moves.
The "global crisis" example
Hedging ETFs are also gaining traction because of the bifurcated
nature of the globaleconomy . The U.S. economy appears to be doing
well, even as troubles in Europe deepen. The primary exposure that
U.S. investors have to Europe is through large-cap stocks found in
the S&P 500. By some estimates, roughly one-third of all sales
generated by S&P 500 firms are in their European divisions.
If you think the U.S.will fare much better than Europe in 2013,
then it might be wise to focus yourinvestments on companies that
derive most of their revenue domestically. And you can inoculate
your portfolio against the global risks that U.S. multinationals
face by buying shares of the
UltraShort S&P500 (
. This is known as a "2X" fund, which means it moves at twice the
rate -- in the opposite direction -- of theindex you aim to focus
upon. In this example, a 5% drop in the export-focused S&P 500
wouldyield a 10% gain for this fund.
Investing in a 2X or 3X fund may seem aggressive, but that
multiplier is simply a way to let you gain a decent-sized hedge
without buying too many shares. For example, if you own $100,000 in
stocks and acquire $10,000 worth of a 2X fund, then you are really
providing only the equivalent of a $20,000bearish hedge against
that otherwisebullish $100,000 portfolio.
As you dig into this group of ETFs, you'll find a widening array
of options to meet your needs. For example, if you think that 2X
hedging against the S&P 500 isn't enough, you might want to
check out the
Direxion Daily S&P
500 Bull 3x Shares (Nasdaq: SPXL)
, which will really prosper if the S&P 500 finally pulls back
In fact, you can use these "leveraged" ETFs in an opposite
fashion. If the market pulls back sharply, but you feel strongly
that a rebound is coming, then there are a number of 2X and 3X
funds that rise when the market does. For example, the
500 (Nasdaq: UPRO)
is a bullish 3X fund, which would convert a 10% rise in the S&P
500 into a 30% gain for this ETF.
Do you think gold mining stocks are ripe for a big rebound in
2013 after a dismal 2012? Well, the
Daily Gold Miners Bull 3X Shares ETF (Nasdaq:
would help deliver magnified returns for this investment group.
Indeed there are leveraged ETFs -- both bullish andbearish --
targeting a widening array of sectors and industries.
Action to Take -->
These ETFs are a perfect tool for investors who lack interest in --
or access to -- investment accounts that allow for "shorting"
stocks. (A number of retirement plans, for example, don't allow you
to short stocks.) These funds allow you to sit tight with your
favorite stocks, avoiding the need tocash them out and pay capital
gainstaxes , even if you think the broader market is headed for a
This article originally appeared on InvestingAnswers.com:
These 5 Strategic
Funds Could Buffer You In The Next Market Crash