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3 ETFs for Momentum Investors

3 ETFs for Momentum Investors
By Ron DeLegge, Editor
January 22, 2009

SAN DIEGO (ETFguide.com) - Wall Street has many sayings.

For example, there's "Don't fight the Fed," there's "If you're going to panic, panic early" and there's "Sell down to the sleeping point." Sound familiar?  If you've been investing in stocks or bonds for longer than 6-months, you've probably heard at least one of these sayings. Another popular saying is, "The trend is your friend." 

To that end, the trend of weakness in stocks continues to demonstrate itself.

Here are three ETFs with positive momentum in the early going of 2009:

Short S&P 500 ProShares (NYSEArca: SH) +6.48% (YTD Gain)*
This ETF is designed to deliver the daily inverse performance of the S&P 500 stock index. Over the past 52-weeks the S&P has been dragged through the mud because of its market exposure to financial and technology stocks. The only relatively bright spot within the S&P has been consumer staples (AMEX: XLP).

In 2008, SH climbed by 39.42% compared to a 37.38% fall in the SPDRs ETF (AMEX: SPY). Both SPY and SH are benchmarked to the S&P 500. Exxon Mobil (4.54%), General Electric (2.41%), and Procter & Gamble (2.31%) represent the S&P's three largest holdings in order. SH's annual expense ratio is currently 0.95%.

UltraShort Financials ProShares (NYSEArca: SKF) +47.90% (YTD Gain)
This short ETF attempts to deliver twice the opposite daily performance of the Dow Jones U.S. Financial Index. Simply put, when financial stocks decline in value, SKF is supposed to increase in value and vice versa. The financial sector includes stocks of banks, insurance companies, and securities brokers. Given the collapse of financial stocks last year, SKF's modest gains were a huge disappointment. 2008's returns were complicated by a temporary ban against short selling in financial stocks.

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In 2008, SKF gained 4.28% compared to a 55.21% fall in the Select Sector Financial SPDRs (AMEX: XLF) While XLF is benchmarked to S&P 500 financial stocks many of the same holdings are duplicated in the Dow Jones U.S. Financial Index which SKF is pegged to. SKF's annual expense ratio is currently 0.95%.

UltraShort Real Estate ProShares (NYSEArca: SRS) +13.60% (YTD Gain)

This short ETF attempts to deliver twice the opposite daily performance of the Dow Jones U.S. Real Estate Index. Even though real estate stocks declined by 36% on average in 2008, SRS declined too. Theoretically SRS should've increased in value but it failed to deliver. Hopefully, ProShares will do a better job this year by making sure SRS does what it's designed to do. So far, the year-to-date (YTD) 2009 performance numbers look good.

In 2008, SRS fell by 50.24% compared to a 39.99% fall in the iShares Dow Jones U.S. Real Estate ETF (NYSEArca: IYR) IYR is benchmarked to the same underlying index. SRS's annual expense ratio is currently 0.95%.

Mixed Record
Most short ETFs are less than 3-years old and don't have a lot of trading history behind them. In 2008, certain short ETFs did not deliver on their promise to deliver opposite market performance while others did.

Contrary to the propaganda being promoted by individuals like CNBC's Jim Cramer, short ETFs are not to blame for the volatility and dislocations we see in today's stock and bond market. Poor business decisions made by corporate executives are the principle and contributing factors for the destruction of trillions of dollars of shareholder capital. Also, maybe one of the reasons Mr. Cramer dislikes short ETFs so much is because many of them have handedly beaten his errant TV stock recommendations.

Your Momentum Strategy
Before you decide to incorporate short and leveraged ETFs into your investment strategy, it's important that you fully comprehend how these products work. Do you really know as much as you think you know?

As we touched on, a common misconception is that short ETFs deliver the exact opposite performance of the indexes they cover. However, due to expense ratios, tracking error, product structure, and market forces, the annualized performance of short ETFs will almost never match the exact opposite annual returns of their corresponding benchmarks. To learn more, we encourage you to read, "Leveraged and Short ETFs - Three Flaws You Should Know."

Conclusion
Short ETFs are showing positive momentum here in the early going of 2009. A balanced ETF portfolio with low cost exposure to the major asset classes might benefit by having some exposure to short ETFs. The precise amount of exposure to short ETFs will depend on each individual's investment goals and level of risk tolerance.

Properly used, short and leveraged ETFs can compliment your portfolio strategy. On the other hand, an undisciplined or naive view of these specialized funds can be disastrous to your financial health.

*Performance posted through 1/21/09 market close


Below is an excerpt from the ETF Profit Strategy Newsletter – Published on Oct.21, 2008
At the time, the Dow was above 9,000. It dropped below 7,500 and rallied into Nov./Dec

Market Meter

Short-Term: published on Oct. 21, 2008
The Dow should find a “trade-able bottom” between 7200 – 7,500
Mid-Term: published on Oct. 21, 2008
Once bottomed, the stock markets will rally into Nov/Dec
Long-Term: >> Sign up to find out


How did you do? >> Sign up for the ETF Profit Strategy Newsletter to be a step ahead


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