Consequently, most investors may utilize leveraged and inverse ETFs to execute opportunistic short-term trades, generate portable alpha, hedge market turns, preserve capital or capture volatility.
Investors and advisors often allocate a good segment of their portfolios to tactical trades to pounce on short-term opportunities. In a survey of advisors on the webcast, 29% of respondents showed they held 11% to 25% of their portfolio in tactical investments and 28% revealed they held 1% to 10% in tactical positions.
Looking ahead, Jablonski pointed to a number of potential opportunities. The repatriation policy will have an effect on S&P 500 ETFs, the Affordable Care Act and Pharma Pricing regulations affect healthcare, Wall Street regulation affect financials, minimum wage affects retail and homebuilders, foreign trade agreements affect china and international markets, Federal Reserve action affect Treasuries and oil regulation affect the energy sector.
For example, the Fed’s recent decision to stand pat on interest rates helped the Direxion Daily Gold Miners Index Bull 3X Shares (NYSEArca: NUGT) surge but dragged on the Direxion Daily Gold Miners Index Bear 3X Shares (NYSEArca: DUST) as a normalizing interest rate environment negatively affects gold prices. On the other hand, if the Fed hikes interest rates, NUGT would have plunged and DUST would have jumped.
When trading ETFs, investors may be wary of less liquid funds with perceived low volume trading action. However, Andrew McOrmond, Managing Director of ETF Trading Solutions at WallachBeth Capital, tried to shed light on how ETF trades. Specifically, McOrmond highlighted the fact that ETF’s true liquidity is represented by its underlying assets.
An ETF is only as liquid as its underlying holdings. If a trader sees low volume trades on an ETF, one can work with his or her brokerage platform and even an alternative liquidity provider, like WallachBeth, to execute a large ETF order without negatively impacting market prices.
Financial advisors who are interested in learning more about leveraged and inverse ETF strategies can watch the webcast here on demand.