After a year of wild market swings, the average investor is taking a more conservative approach. With exchange traded funds, investors can maintain market exposure while hedging against potential downsides.
Inverse and leveraged ETF products are an easy way to maintain quick and profitable positions, writes Andrés Cardenal for The Motely Fool, but many investors do not fully understand the investments. [Trading Inverse and Leveraged ETFs]
For instance, a “short” ETF will move in the inverse direction of the underlying index. That is, the ETF will rise by the same amount the underlying index falls, or vice versa. However, these types of ETFs are intended to mimic daily performances, and longer time frames will result in varying performances.
Leveraged inverse ETFs try to provide 2x or 3x the daily performance of a benchmark index. Again, these are intended as short-term holdings, as compounding issues will result in diverging performances to the index over the long-run.
If investors are wary about such investment products, there are other options available.
For instance, the PowerShares DB U.S. Dollar Bullish Fund (NYSEArca: UUP), which tries to reflect movement of the U.S. dollar against a basket of foreign currencies, is a good way to capture safe-haven sentiment during times of volatility or uncertainty – the ETF has proven to be uncorrelated with stocks.
In contrast, gold ETFs, like the SPDR Gold Trust (NYSEArca: GLD), can be used to protect against depreciating currencies, especially in light of the loose global monetary policies in the wake of the financial crisis. [Gold ETFs for $1,800 or $1,600 an Ounce]
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own GLD.