Using ETFs in a Tough, Sideways-to-Bear Market
by Max Isaacman
The past 10 to 12 years have been difficult for stock market investors, with high volatility making it risky to buy and hold stocks and exchange-traded funds (.
This has forced long-term investors to become traders and to use securities they never thought they would, such as inverse and enhanced ETFs. This volatile, sideways market could continue for several more years. Investors and traders have to use the volatility to make money, while attempting to limit losses.
In this article
- Ways to Pick ETFs
- Ways to Weight ETFs
- The Upcoming Cycle
- Take Information From the Pros
- One Manager’s Approach
- What an Investor Can Do Today
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In my book “Winning with ETF Strategies” (FT Press/Minyanville Media, 2012), I point out that you should determine at what point in a cycle the market is currently and where it might be heading. Markets move in cycles, which take years to complete. In my book there is research by Guggenheim Investments showing that over the past 113 years, there were more bear market years than bull market years. Bull markets lasted an average of 10 years, and bear markets lasted an average of 18 years. The bear years were more similar to sideways markets than big down markets.
Since there are usually more bear market years than bull market years, you have to get the best return you can during bear market years. Instead of using broad-based ETFs, you might use specialized ETFs such as sector ETFs, foreign country ETFs, non-stock-market-correlated ETFs, inverse ETFs (which enable you to short the market), and enhanced ETFs (which enable you to leverage a position).
You have to be careful with inverse and enhanced ETFs, however, understanding how they work before using them. These are effective and useful trading securities that pretty much do what they are structured to do, which is to give a percentage return over a given period of time, such as a single day. However, there is a compounding factor when enhanced funds are held longer than their given time. There is much information about how traders and investors did not understand the compounding effect and how it affected their returns, which were different than the anticipated returns.
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