10 Ways You Can Use ETFs
February 19th 2009 at 12:00pm by Tom Lydon
Forget “the grass is always greener.” Exchange traded funds (ETFs) are such a versatile tool, there are myriad ways you can use them in your portfolio, and you won’t be longing for anything else. Here are 10 of them.
Michael Shulman of The Option Insider outlines some of these strategies:
- Play an entire segment of the market, instead of individual stocks. For example, why try to pick between General Mills (GIS) and Kellogg (K)? Get exposure to both in the PowerShares Dynamic Food & Beverage (PBJ).
- Use them for technical purity – ETFs are the purist way to mimic the movement of a market segment.
- Use them for options. When going long or short an ETF, buy options on stocks or the market, enabling exposure to entire market segments.
- Minimize volatility. An ETF allows you to prevent putting all of your eggs in one basket. Some individual semiconductor stocks can fluctuate between 10%-33% in a given day; an ETF will give you exposure to the sector, but will also spread your exposure between several stocks.
- Maximize volatility. To maximize volatility, utilize short and leveraged ETFs for short-term movements. A drop of 3% in the Dow Jones Financial Index equates to a 6% gain in the ProShares UltraShort ETF (SKF), which would probably generate a 40%-75% gain in selected calls for the ETF. Be aware of how short and leveraged ETFs track over time, however.
- Use them to reinforce a profitable belief. ETFs enable you to play a belief, like oil is going to go up. We should note that this is not our strategy – we wait for trends instead of going on hunches.
- Quickly playing trends for profit. A call or put on an ETF enables you to play a trend and get in and out quickly.
- Playing for long-term profits. ETFs are a great way to play the long-term, underlying fundamentals of a market segment.
- More positions, more profits. ETFs enable you to extend the reach of your portfolio, by playing different market segments in a cost-efficient manner.
- Calls on short and leveraged ETFs. Buying a call on an inverse or short ETF may produce the best short-term gains when you want to short the market. Be very careful with these, they are risky.
ETFs are great tools to utilize, but before you start utilizing them, do your homework, don’t overextend yourself always understand what you’re getting into.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.