Alternative ETFs: Sophisticated Strategies in a Simple Package

An investor can bet big and win big, but there is always the chance of losing big, too. One way to get around this is to consider some “alternative” exchange traded funds (ETFs) that combine both bullish and bearish market positions.

Alternative ETFs bring sophisticated trading techniques to the average investor, according to iStockAnalyst. For instance, some utilize “130/30,” which refers to a portfolio tool that uses leverages to create a 130% long position and a 30% short position. This is similar to hedge fund techniques that may allow an investor to make money on both the up- and downside of the market. [More on 130/30.]

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

It should be noted that these types of ETFs haven’t been trading long enough to develop a solid track record. Other hedge fund-esque ETFs use strategies like long/short, global macro, and merger arbitrage.

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

Another type of investment technique uses what you might have heard as “covered call writing” or “Buy/Write.” One buys a stock and sells an equivalent of call options against it. As a result, you’ll be forced to sell at a profit, but if the stock goes down, the loss will be reduced by the amount of income received from selling options that expire. If the stock goes sideways, then you keep the option-selling income with no gains or losses on the shares. [More on Buy/Write.]

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

When people think of market volatility, they look at the Volatility Index, or VIX. The VIX is a “fear guage” that is low when investors are optimistic about the market and high when people become gripped with fear. [More on the VIX.]

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

Be sure to read Rydex|SGI’s Carl Resnick’s thoughts on bringing alternative indexing strategies into the mainstream, as well. You can find the story here.

Read the disclaimer, as Tom Lydon is a board member of Rydex|SGI.

Max Chen contributed to this article.