Page 2 of
2 Bear
market leaves short options By
Julian Delasantellis
Owning an ETF
comprised of a broad basket of Chinese stocks,
such as the Power Shares Golden Dragon Halter USX
China Fund, PGJ, might allow you some sleep at
night.
Moving with the sun, you can do
Thailand with the iShares/MSCI Thailand product,
THD, Malaysia with the iShares Malaysia Index,
EWM, and at least a half dozen India based ETFs.
Israel’s booming high-tech centered economy can be
played through with EIS, Turkey’s with TUR, South
Africa’s with EZA. For a piece of what may be
finance capitalism’s final great frontier, you
might look at the S&P SPDR Emerging Middle
East and Africa Fund, GAF.
Moving on to
Europe, there are about 25 ETFs specific to that
continent now trading,
from the Market Vectors RTX Russia fund to the
iShares/MSCI United Kingdom Index, EWU. There are
funds for small to mid-cap European equities, such
as the PowerShares FTSE RAFI Europe Small-Mid ETF,
the PWD. On the other hand, if you’re willing to
assume the added risk that high-yielding stocks
often carry, there’s the Wisdom Tree Europe High
Yielding Equity ETF (DEW), allowing a double
profit potential from both high-dividend payouts
and the US dollar’s continuing fall against the
euro.
Finally, we complete our round the
world tour of modern finance with five ETFs
devoted to Latin America, from EWW, iShares'
Mexico fund, to ECH, for Chile.
Not really
into that whole stock ownership thing? Now there
are ETFs for you, too. Long-term US government
securities usually see impressive price gains in
the midst of severe stock market selloffs; if you
think that’s in store you could look at TLT,
iShares Long Term Government bond ETF. On the
other end of the yield curve, short-term US
government securities move up in value with each
Federal Reserve rate cut; if you think that the
Fed has more rate cutting to do from its current
Federal Funds rate of 2.25% (such as to the 1%
level Alan Greenspan took the rate down to from
June 2003 to June 2004), the iShares/Lehman SHY
1-3 year Government debt ETF might be worth a
look.
There are also corporate bond ETFs
for those who can stand a bit more risk, such as
the iShares iBoxx Investment Grade Corporate Bond
ETF, ticker symbol LQD, or even international bond
funds, such as the SPDR/Lehman International
Treasury Bond ETF, ticker symbol BWX.
One
of the great recent developments in ETFs are funds
that allow you to play the currency markets, to
diversify away from the sickly US dollar, without
the dangers of playing the wild and wooly, and
increasingly illiquid, currency futures markets,
or the murderous bid/ask spreads a small investor
would be subject to in the cash forex markets.
There are ETFs that allow you to profit
from the appreciation of the Australian dollar(
FXA), the British pound, (FXB) the euro (FXE), the
yen (FXY) and others. In the past few weeks, what
may be a real goldmine for traders and investors
hit the market, the first Chinese yuan ETF (CNY)
representing the currency that, for political
factors involved in keeping access for Chinese
products to American and other Western markets
open, seems to have no place to go but up.
Frequently on these pages are the voices
of various economic sages advising gold purchases
as a way to protect yourself from the inevitable
upcoming Gotterdammerung. If you feel that way
(and from your e-mails I know a lot of you do)
there are the precious metals ETFs, for gold, the
hugely traded (at about 12 million shares just on
one average day) GLD, for silver, the SLV, for the
precious metals sector as a whole, the DBP.
Purchases of these ETFs are infinitely superior to
either playing the futures markets, or,
alternatively, buying gold bars and risking a
liability lawsuit if your neighbor trips over the
pile of them you have in your living room.
If you believe that this new century’s
real storehouse of wealth will not be gold, John
Maynard Keynes’ "barbarous yellow relic", but what
the Beverly Hillbillies called "black gold-Texas
tea", in other words, crude oil, the USO ETF,
which tracks crude oil prices, might be worth a
look.
What if you really want to play this
game fast, what if you find that trading plain old
ETFs has become just way too dull, the same way
you now feel about your previous leisure time
diversions, bungee jumping or playing Russian
Roulette? Well, there is a new ETF phenomenon for
you, too, the leveraged ETF.
If you buy a
standard index ETF, say, the SPY, which represents
the movements in the S&P 500 index, you can
expect that for every 1% move, up or down, in the
index, your ETF will gain or lose 1%. Leveraged
ETFs double your pleasure, double your fun, but
also, if the market turns against you, they double
your pain. Thus, on a day that the S&P 500
index rises 1%, the Rydex 2X S&P 500 ETF ,
ticker symbol RSU, will rise 2%.
And it
works the same on the downside. If the NASDAQ 100
index declines 1%, the Ultra Proshares QQQ ETF,
ticker symbol QLD, will decline 2%. On the flip
side, there are many leveraged bear funds for
those of you with the more pessimistic outlook ,
such as the UltraShort S&P 500 ETF, ticker
symbol SDS , which rises by twice the percentage
that the S&P 500 falls.
Of course, you
could replicate the effects of the leveraged funds
through the purchase or short sale of the regular
index funds on margin, but that involves a margin
account, with payment of margin interest to your
broker. Trading ETFs is exactly like trading a
stock - if you can do that, you can do ETFs.
Once you get beyond the straight buying,
selling, or selling short of ETFs, one of the most
interesting things you can do with them is to use
them, in combination with the stocks in your
portfolio, to make some sophisticated trades to
either protect or enhance your portfolio’s
returns.
A couple of weeks ago, the
S&P 500 stock index was down almost 15% for
the year. Maybe your portfolio was down only 5%;
you might feel proud that you’d outperformed the
general market by 10% (in stock lingo, you had 10
points of what is called "alpha"); but then again,
you’re still down 5% in real money. (For a
discussion of the concept of alpha, what you
receive in portfolio return independent of the
general market’s movements, and beta, the general
market return, see No such thing as a Sure
Thing, Asia Times Online, October 2,
2007).
OK, what you need to do, since
you’re obviously such an ace at picking alpha
stocks that will beat the general market, is to
find and invest in an ETF whose price movement
will offset the general market’s decline.
Maybe you’ll want to short the SPY ETF; as
the general market declines, this investment will
increase in value; leaving you to enjoy your
specific outperforming stocks. You could also do
the same thing with long positions in the
leveraged bear orientation ETFs referenced above.
Maybe you’ve noticed that the stocks of
one particular sector, say industrial equipment,
are booming even with the retrenchment of the
general consumer economy. You could go long with
either an industrial sector ETF, such as the XLI
industrial sector SPDR, or an individual stock
from the sector, and then balance that beta market
risk with long positions in an ETF such as the
SKF, which goes up at twice the rate the stocks of
the banking sector go down.
The
complicated thing here is the weightings of each
leg of these hedging maneuvers. Too much weight on
one leg and you could be either inadequately
protected from market risk, or so protected from
market risk that the alpha in your good stocks
gets eaten up by the hedge.
Wall Street’s
great houses of money, with zillions in computer
power put at the disposal of freshly minted MIT
math PhDs, regularly get this wrong, so don’t
expect that you will get it perfect the first time
with just the statistical package in Microsoft
Excel. Of course, if you’re wrong on both legs of
the trade, say if industrial stocks turn down,
while banking and finance stocks turn up, your
losses will pile up very fast. As old Ed Hart of
the Financial News Network used to say, "the only
perfect hedge is in a French garden".
If
you are actually a whiz at picking individual
stocks, say, if you’re really good at chart
analysis, or can see through a balance sheet’s
lies, you’ll probably do better with individual
stocks than ETFs. Until then, there are ETFs.
Also, if you’re one of the few people in finance
that still believe in the efficient markets
hypothesis, go ahead and do your index trading
through ETFs, and do it very cheaply.
But
if you’re wondering what to do with your money and
your investments as the economic crisis deepens,
you should definitely look into some of the many
things you can do with ETFs that I’ve elaborated
on here. If you’re watching your big capital gains
accumulated from the 2003-07 bull market slowly
slip away, you should definitely look at ETFs;
they present a very viable alternative to selling
and taking a big capital gains tax hit.
Taking off my investor advisor hat to once
again don the frayed tweed chapeau of the economic
pundit, I note that on many days, half or more of
the trading volume of the American Stock exchange,
where most ETFs are listed, consists of ETFs.
Since ETFs overwhelmingly represent
speculation, as opposed to the straight investment
involved in the purchase of individual stocks,
should this be a matter of concern? After all,
even John Maynard Keynes once said that "when the
capital development of a country becomes a
by-product of the activities of a casino, the job
is likely to be ill-done."
Yes, ETFs are
primarily vehicles for speculation, but, compared
with some of the other speculative vehicles we’ve
now learned of being recently existent in the
financial markets, like 2/28 subprime "reset"
mortgages, and structured investment vehicles
containing subprime mortgage paper leveraged at 20
to 30 times cash, ETFs are, if anything, fairly
innocuous and harmless.
To try to
surgically excise all speculation from the
capitalist system would, in effect, deny the
system its essence, it would kill the patient on
the table.
In the H G Wells 1895 novel
The Time Machine, the time traveling
narrator speculates on the perfect world his
machine had passed through, lands undoubtedly
bereft of all financial speculation.
"Once, life and property must have
reached almost absolute safety. The rich had
been assured of his wealth and comfort, the
toiler assured of his life and work. No doubt in
that perfect world there had been no unemployed
problem, no social question left unsolved. And a
great quiet had followed.
Then, after
passing by two catastrophic world wars, the time
traveler arrives in the year 802,071, a seemingly
pleasant time, but, in reality, a society where
the innocent and childlike Eloi class are nothing
but digestives for hideously cannibalistic
Morlocks.
I guess there are worse things
than a little financial speculation.
Julian Delasantellis is a
management consultant, private investor and
educator in international business in the US state
of Washington. He can be reached at
juliandelasantellis@yahoo.com.
(Copyright 2008 Asia Times Online Ltd.
All rights reserved. Please contact us about sales, syndication and republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
