TRADEX supports the Individual Investor. How can ETF investing make you look like an expert?

May 24, 2008 - PRLog -- Aside from the obvious benefits of investing in index derived funds ranging from improved diversification (in many cases) to market sensible returns and volatility, making room in your portfolio to at least two or more ETF investments may significantly lower your portfolio risk and in many ways even hedge your other investments from unexpected market turns.

Without going into ample technical explanations, portfolio risk is in great measure reduced by diluting the exposure to a small number of assets and even as it’s protective effect is limited after a few assets are added, the addition of sector or broad market indexes are by no means a worthy addition to most portfolios.

As for sector allocation, the immense variety of sector following ETFs, can afford a greater scope of market segments for the investor to broaden his exposure to areas were investing in individual issuers may be impractical. As individual investors it may be suitable to identify an opportunity in a rising market sector, for example a niche related to Semiconductor manufactures in North America, yet investing in one or two stocks may increase your portfolio’s risk considerably. By acquiring IGW (S&P North American Technology-Semiconductors Index Fund) one obtains exposure to a basket of U.S.-traded semiconductor stocks in a well diversified manner and at low cost.

To even greater advantage, the measured application of an inverse or short position ETF like SH (Proshares Short S&P 500) to an average portfolio might allow benefits far beyond regular index tracking ETFs. Because a short ETF moves one or two times inversely to the day’s movement of the index, a hedging strategy can be applied with little effort and cost compared to sophisticated tools used by hedge funds. Unlike setting a short position were a loan and margin cost is involved, an inverse short or ultra short position allows for a broader even less precise entry strategy were minimizing market swings becomes the primary strategy.

During most flat or lateral moving markets these short position ETFs can also be useful to profit from down legs, inversely for upswing movements the Ultra long ETFs like QLD (Proshares Ultra QQQ) may help maximize those periods by doubling the indexes´ daily performance.

What about other interesting markets? Let’s say today’s booming commodities markets, in which exposure to commodities like gold, oil or even corn could require special familiarity relating to the futures markets, transactional costs and even particular types of accounts and leveraging. Commodities ETFs like IAU (COMEX Gold Trust) allows easy and fast access to Gold inventories in a manner that would have been unheard a couple of years ago.

Bonds anyone? Often ignored by aggressive investors, the almighty Bond can be a lifesaver to any stock portfolio on stock market declines or unfavorable interest rate environments. The addition of a basket of Treasury bonds anywhere from 1 to 20 years in maturity is an effective instrument to create a better-balanced portfolio, also a corporate bond holder like LQD (iBoxx $ Investment Grade Corporate Bond Fund) is a great alternative to buying individual corporate bonds.

In today’s volatile markets, the use of ETF investments is not only a good common sense investment alternative, but an impressive tool to add market sectors, hedging strategies and alternative markets that were not available to the average investor a few years ago.


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    Ramon Castro
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