All three major indexes – the Dow Jones Industrial Average, the S&P 500 and the Nasdaq – have hit new intraday highs for 2009. The move was sparked by growth in Japan, a rally in energy and a positive report from the retail sector. Federal Reserve Chairman Ben Bernanke also spoke this morning to say that the central bank would monitor the value of the dollar as they keep rates at record lows. (Is it time to stick a fork in the dollar?). The SPDRs (NYSEArca: SPY) are trading up about 1.5% this morning.

October retail sales made a surprise 1.4% gain on the strength of auto sales, reports Martin Crutsinger for the Associated Press. While the report is just what the markets needed after dismal September figures, analysts are still concerned about consumer spending in general. After all, unemployment is still sky-high, incomes are stagnating and credit remains constricted. Consumer Staples Select Sector SPDR (NYSEArca: XLP) is up about 1% this morning.

UPS (NYSE: UPS) is projecting that it will move about 22 million packages this year on its busiest day, Dec. 21. The volume is slightly higher than what it was in 2008. The number will match the previous record forecast, which was set in 2007, reports Mary Jane Credeur for Bloomberg. iShares Dow Jones Transportation Average (NYSEArca: IYT) is up about 2.5% this morning. (For more stories on transportation, visit our category).

]]> http://www.etftrends.com/2009/11/midday-market-update-indexes-hit-intraday-highs.html/feed/ 0 http://www.etftrends.com/2009/11/how-use-leveraged-inverse-etfs.html http://www.etftrends.com/2009/11/how-use-leveraged-inverse-etfs.html#comments Tue, 03 Nov 2009 21:00:31 +0000 Tom Lydon http://www.etftrends.com/?p=19857 At a time when some investors are trying to get creative with portfolio management while reducing overall risk, leveraged and inverse exchange traded funds (ETFs) might be the right answer if you understand them.

Leveraged and inverse ETFs aim to have the funds’ movements correspond to the inverse of the relevant market indicator on a daily basis.  One must keep in mind that these ETFs come with risks, as well. The biggest issue to understand is the meaning of the word “daily” when it comes to these ETFs: daily, they will track their benchmarks. The further out an investor gets, the greater the risk that the fund won’t track its benchmark perfectly. This effect is heightened in volatile markets. (Check out our special report on these investment tools).

There are a growing number of providers of such ETFs today, including Direxion, ProShares and Rydex.

These funds can be appealing to investors with the risk appetite for several reasons:

• They can be used as a hedge if an investor believes the market is due for a short-term correction. If an investor is holding a position, but doesn’t necessarily want to sell it, then a leveraged or inverse ETF can be used to hedge against any potential loss.
• They can be used to capitalize on market movements. If an investor believes that the S&P 500 is due for a nice run, a leveraged ETF to maximize this movement might be just what the investor wants. (How leveraged ETFs are misunderstood).

These funds aren’t for everyone – always be fully aware of the risks and know how they work before you invest.

For more on leveraged and inverse ETFs, visit our leveraged ETFs category.

Some examples of common inverse and leveraged ETFs are:

• ProShares Short S&P 500 (SH), which seeks to give 100% of the inverse daily performance of the S&P 500.

• ProShares Ultra S&P 500 (SSO), which seeks to give 200% of the daily performance of the S&P 500.

• Emerging Markets Bear 3x Shares (EDZ), seeks to give 300% of the inverse daily performance of the MSCI Emerging Markets Index
  

• Technology Bull 3x Shares (TYH), seeks to give 300% of the daily performance of the Russell 1000 Technology Index

• Rydex 2x Russell 2000 (NYSEArca: RRY), seeks to give 200% of the daily performance of the Russell 2000 Index

• Rydex Inverse 2x S&P MidCap 400 (NYSEArca: RMS), seeks to give 200% of the inverse daily performance of the Mid Cap 400 Index

Kevin Grewal contributed to this article.

The Dow Jones Industrial Average finally crossed a milestone 10,000 points this month. Though the mark was greeted with cheers on the trading floor, it didn’t stay there for long, and ultimately closed the month below 10,000 and ended the month flat. The S&P 500 lost 2% and the Nasdaq fell 3.6%.

October was largely a month that saw a weakening dollar. This was to the benefit of commodity ETFs, including SPDR Gold Shares (NYSE: GLD), which gained 3.7% for the month. United States Oil (NYSEArca: USO) gained 8.6%.

Earnings season was a largely encouraging one. The number of better-than-expected reports outnumbered the worse-than-expected ones by a ratio of about 6:1. But there are still big concerns about consumers: spending dropped 0.5% in September. As long as consumers aren’t spending, the recovery could be long and difficult.

To view our full performance report, click here.

For full disclosure, Tom Lydon’s clients own shares of GLD.

Exchange traded funds (ETFs) are baskets of securities with an underlying index that trade all day on an exchange like a stock. They’ve been around since 1993. The first ETF, the SPDRS (NYSEArca: SPY), tracked the S&P 500. The strategy of indexing is not new, however. Barclay’s created it in 1971.

Some of the advantages of ETFs include:

• You always know what you’re buying, because they replicate indexes. The holdings of those indexes are easily available and posted daily.
• ETFs offer safety in numbers. They have more diversification because they’re a basket of stocks rather than one individual stock.
• Their performance can be easily tracked.
• ETFs tend to have lower expenses and fees because they passively track indexes. There are no additional fees to pay to a fund manager. The average fee for a mutual fund is about 1.6%, while for a large-cap growth ETF it’s about 0.15%.
• They’re tax efficient because investors rarely generate capital gains.

It’s easy to trade ETFs. Esko Mickels for Morningstar compiled a list of tips all ETF investors should have under their caps, and we tossed in a few bonus ones of our own, as well:

1. Timing the trade: Be careful buying and selling ETF during the first and last 30 minutes of the day. An ETF’s volatility is highest at those times and wide spreads are more common.

2. Exercise caution on volatile days: Volatile days in the market can throw an ETF’s underlying value off of its bid-ask spread, so tread with caution.

3. Limit orders: Use these to define the price you’re willing to pay, thereby limiting your market impact. Read more on limit orders here.

4. Select ETFs with high trading volume: While high volume doesn’t necessarily equal liquidity, it implies that a limit order for a few hundred shares near the current mid-market price should be filled quickly. These also remain closer to their NAV.

5. Trade during an open underlying market: If you are investing in overseas markets, it is best to trade the correlating ETF when the overseas market is open. This avoids any uncertainty.

6. Use a stop-loss: A stop-loss is an automatic sell order that is triggered when an ETF’s price falls to a predetermined threshold. The most common stop-loss is set at a specific price, which allows you to limit losses. A trailing stop-loss ratchets up the stop-loss price as your ETF’s price increases. Read more on stop losses here.

7. Watch the fees: Consider broker fees for every transaction. The more trades you do, the more you are paying in fees, taking away from your gains.

8. Leveraged ETFs: Pay attention to thee funds daily, as they can move in radical directions. These also require re-balancing often, meaning more fees to rack up. More on leveraged and inverse ETFs can be found here.

9. Market makers: Market makers working for the designated brokers add liquidity and help keep the bid-ask near the ETF’s underlying value, so having more is generally desirable.

10. Distribution date: Most ETFs are very tax efficient because their turnover is low. There’s the potential that investors holding some ETFs on the day of record can trigger a capital gains event. More information on taxes and ETFs can be found here.

Investors looking for dividend-paying stocks will encounter the argument that “growth” stocks may be better than those paying dividends, remarks John Jagerson for Learning Markets. (Read about how dividends can help).

Dividend-paying stocks, however, have usually outperformed major growth indexes as a result of lower volatility returns. For example, the Dow Jones Select Dividend Index has outperformed the S&P 500 and the Russell 2000 by almost 100% in the last 10 years.

Jagerson commented that an investor does not need to decide on a dividend-paying portfolio over a growth-oriented portfolio. A reasonable alternative may be a combination of the two.

You could take the time to scrounge up individual stocks that pay dividends, but you may also consider ETFs as an easy way to gain exposure to dividend-paying stocks. (Read about strategies to rebuild your portfolio).

For more information on dividends, visit our dividend category.

• SPDR S&P Dividend ETF (NYSEArca: SDY): up 16.4% year-to-date; yields 4.27%

• WisdomTree LargeCap Dividend (NYSEArca: DLN): up 15.8% year-to-date; yields 2.94%

• iShares Dow Jones Select Dividend Index (NYSEArca: DVY): up 7.1% year-to-date; yields 4.32%

Max Chen contributed to this article.

Some major assets are priced at 1999 levels, and if the current situation resembles past ones, there may be opportunities on which you can capitalize, remarks Stacy Johnson for Wise Bread.

Case in point: housing prices have been greatly reduced, and commercial properties may now provide better cash-on-cash return – not including tax write-offs that may make them extra enticing.

• iShares Dow Jones U.S. Real Estate (NYSEArca: IYR): up 19.8% year-to-date

• iShares FTSE NAREIT Industrial/Office Complex (FIO): up 17.9% year-to-date

Another example is the stock markets. After the spectacular gains since the March lows, the stock market is still lower than it was prior to January 2000.

• SPDRs S&P 500 (NYSEArca: SPY): up 20.3% year-to-date

If you are one of the lucky few that does have money but doesn’t know what to do with it, luxury items have cheapened. The opportunities found in lower prices don’t come often.

• Claymore/Robb Report Global Luxury (NYSEArca: ROB): up 50.5%year-to-date

In the sage words of Warren Buffet, “be fearful when others are greedy and greedy when others are fearful.” It is also prudent to have a plan in place before you invest. We use the 200-day moving average to choose those areas that could be about to enter a long-term uptrend. You can read more about the trend following plan in our book, The ETF Trend Following Playbook.

For more information on trend following, visit our trend following category.

Max Chen contributed to this article.

According to Don Dion for The Globe and Mail, he’s chosen his top five ETFs based on the fact that he feels they capture their theme, provide liquidity and exploit the advantages of the ETF model. This is by no means a conclusive list – there are many, many worthy ETFs out there.

These five ETFs address important themes in the financial world of today:

Biotech. iShares Nasdaq Biotechnology (NasdaqGM: IBB) is up 11% year-to-date. Biotechs include many start-up companies that burn out, but a lucky few do strike it rich. Instead of shifting through all the possible companies, the ETF offers a great way to pick up the sector.

TIPs. iShares Barclays TIPS Bond (NYSEArca: TIP) is up 7.1% year-to-date. This fund tracks securities that range in duration from one to 20 years. Indiividual TIPs bonds are taxed on inflation adjustment and TIP distributes inflation-adjustment as income.

India. WisdomTree India Earnings (NYSEArca: EPI) is up 85.8% year-to-date. The fund offers access to the Indian equity market while allowing for the limitations that foreigners might have on investing. Potential investors should note that emerging market equities tend to be more volatile.

Gold. SPDR Gold Shares (NYSEArca: GLD) is up 15.4% year-to-date. Gold has been the talk of the markets these days. Buying gold is a good way to diversify a portfolio. GLD tracks the price of gold stockpiles, so investors won’t be tracking the price through derivative holdings.

S&P 500. SPDRs S&P 500 (NYSEArca: SPY) is up 16.7% year-to-date. The fund has been providing low-cost exposure to the S&P 500. SPY is a good proxy for the market as a whole and Dion believes it to be a must-have fund for any well-rounded ETF portfolio.

Max Chen contributed to this article.

For full disclosure, Tom Lydon’s clients own shares of GLD and SPY.

SPDRs S&P 500 (NYSEArca: SPY), currently up 15.6% year-to-date, with average daily trading volume of 189 million, corresponds to the price and yield performance of the S&P 500 Index. The fund has a net expense ratio of 0.09%.

Sector allocations: information technology, 18.6%, financials, 15.2%, health care, 13.1%, energy, 11.7%, consumer staples, 11.6%, industrials, 10.2%, consumer discretionary, 9.2%, utilities, 3.7%, materials, 3.5%, telecom services, 3.2%

PowerShares QQQ (NasdaqGM: QQQQ), currently up 38.4% year-to-date, with daily average trading volume of 133 million, seeks to track the Nasdaq-100 Index. The fund consists of all stocks in the Index, which includes 100 of the largest domestic and international nonfinancial companies. QQQQ has an expense ratio of 0.2%.

Sector allocations: consumer discretionary 13.3%, consumer staples 1.1%, health care 16.3%, industrials 4.9%, info. tech. 63.1%, materials 0.6%, telecom services 0.8%

Financial Select Sector SPDR (NYSEArca: XLF), currently up 16.1% year-to-date, with average daily trading volume of 112 mil, tries to reflect the returns and characteristics of the Financial Select Sector Index.  The fund has an expense ratio of 0.21%. Top holdings include JP Morgan (NYSE: JPM) and Bank of America (NYSE: BAC).

iShares Russell 2000 Index (NYSEArca: IWM), currently up 19.8% year-to-date, with average daily trading volume of 72 million, tries to mimic results that correspond to the price and yield performance, before fees and expenses, of small capitalization sector of the U.S. equity market, Russell 2000 Index, which represents around 2,000 smallest companies in the Russell 3000 Index. The fund has an expense ratio of 0.24%.

Sector allocations: financial services, 20.5%, consumer discretionary, 16.8%, technology, 15.8%, health care, 15%, materials & processing, 8.2%, producer durables, 8.1%, utilities, 5%, other energy, 3.9%, autos & transportation, 3.5%, consumer staples, 2.6%

UltraShort QQQ ProShares (NYSEArca: QID), currently down 9.2% in the last month, with daily average trading volume of 36 million, seeks daily investment results that tracks twice the inverse of the daily performance of the NASDAQ-100 Index. Note the ETF tries to reflect a -200% return of the Index for a single day. The fund has an expense ratio of 0.95%.

Max Chen contributed to this article.

The Chicago Purchasing Managers Index, considered a precursor to the national Institute for Supply Chain Management Index, fell to 46.1 in September rather than rising to the 52 mark expected by economists.

Additionally, the Commerce Department said GDP, the broadest measure of the economy, sank at a pace of just 0.7% in the spring, beating analysts’ expectations of an annualized drop of 1.1%.  Although GDP numbers are promising, the Chicago PMI data is fresher, and reminded investors that the economy still has major obstacles to overcome before a solid recovery can occur, state Ieva M. Augstums and Tim Paradis of the Associated Press.

In the real estate arena, U.S. mortgage applications fell despite attractive loan rates.  The Mortgage Bankers Association said applications fell to a seasonally adjusted 2.8% in the week of Sept. 25, driven down by a 6.2% drop in demand for purchase loans and a 0.8% decline in refinancing requests.  The data further suggest that a rebound in the housing sector will be a slow one.  The iShares Dow Jones U.S. Real Estate (NYSEArca: IYR) was down 1.5% in morning trading.

In other news, a bit of hope loomed the air as the International Monetary Fund announced that likely losses from the global financial crisis through 2010 are going to be reduced by $600 billion to $3.4 trillion.  The IMF’s reassessment of the potential losses stemming from the financial crisis comes ahead of Thursday’s World Economic Outlook, when the fund will publish its latest estimates for the global economy, reports Carter Dougherty for The New York Times.

Overall, all three major U.S. indexes were down in morning trading with the Dow Jones Industrial Average giving up 0.9%, the S&P 500 dropping 0.9% and the Nasdaq down 0.8%.

For more stories on real estate, visit our real estate category.

Kevin Grewal contributed to this article.

The Conference Board said that its index of consumer confidence fell to 53.1 in September, down from a 54.5 in August and a far cry from the 57 expected by economists.  The decline was attributed to concerns about the labor markets. Consumer confidence is truly the catalyst behind an economic recovery, reports the Associated Press.

The housing sector continues to show signs of life as the Standard & Poor’s Case-Shiller Index, a home price index of 20 major cities, showed home prices rising 1.2% in July from June, marking the third straight month of increases.  To add to this, the index has risen at an 8% annualized rate in the three months to July, the best performance since early 2006, states the Associated Press.  Despite the upbeat news, the iShares Dow Jones U.S. Real Estate (NYSEArca: IYR) was down 1.7% in morning trading.

Crude oil continued to decline as the U.S. dollar gained ground.  Anticipation of the release of an unfriendly government report indicating large crude supplies hovers over the volatile commodity.  Crude fell to $66.51/barrel on the New York Mercantile Exchange.  The United States Oil Fund (NYSEArca: USO) was down 1.1% in morning trading.

Overall, the Dow Jones Industrial Average was down 0.4%, the S&P 500 gave up 0.4% and the Nasdaq was down 0.6% in morning trading.

For more stories on oil, visit our oil category.

Kevin Grewal contributed to this article.