Comments on: Buying an ultrashort ETF as an Insurance http://www.wiftsinvestment.com/buying-an-ultrashort-etf-as-an-insurance/ An Investment Club Mon, 31 Jan 2011 02:36:44 +0000 http://wordpress.org/?v=2.9.2 hourly 1 By: skoirala http://www.wiftsinvestment.com/buying-an-ultrashort-etf-as-an-insurance/comment-page-1/#comment-32 skoirala Tue, 24 Mar 2009 01:04:32 +0000 http://www.wiftsinvestment.com/?p=400#comment-32 Your friend's advice could not have come at a more opportune time! Today's massive market rally has forced ultrashorts to quite attractive levels if you are looking to hedge your portfolio. But one thing I have learned about these ultrashorts is that they are not always great hedges. For example, say I had foreseen this credit debacle back in early 2007 and bought say SKF to short the financials. One would expect such a move to have made me filthy rich, right? Far from it. During certain parts of 2008, even at times when the crisis was in full swing, this SKF would not have earned me much profit, if at all, let alone hedge against the losses on stocks I were long. The reason is the ultrashorts are leveraged ETFs with daily compounded returns (hence, negative returns can become even more negative) and therefore, tend to have some of the wildest price swings (in november 08, SKF went from a little over 100 to 300 in roughly 15 days and back below 100 in like 9 days; ditto with SRS which shorts the real estate index). Hence they are good only for quick bursts of profit-taking over short periods of time, ideally a day, according to the fine print issued by the underwriters. It's a hedge only in the sense that you buy really low, sell really high and use the cash for reserves or reinvestment. Good luck. -SK(f) Your friend’s advice could not have come at a more opportune time! Today’s massive market rally has forced ultrashorts to quite attractive levels if you are looking to hedge your portfolio.

But one thing I have learned about these ultrashorts is that they are not always great hedges. For example, say I had foreseen this credit debacle back in early 2007 and bought say SKF to short the financials. One would expect such a move to have made me filthy rich, right? Far from it. During certain parts of 2008, even at times when the crisis was in full swing, this SKF would not have earned me much profit, if at all, let alone hedge against the losses on stocks I were long. The reason is the ultrashorts are leveraged ETFs with daily compounded returns (hence, negative returns can become even more negative) and therefore, tend to have some of the wildest price swings (in november 08, SKF went from a little over 100 to 300 in roughly 15 days and back below 100 in like 9 days; ditto with SRS which shorts the real estate index). Hence they are good only for quick bursts of profit-taking over short periods of time, ideally a day, according to the fine print issued by the underwriters. It’s a hedge only in the sense that you buy really low, sell really high and use the cash for reserves or reinvestment.

Good luck.

-SK(f)

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