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 (ETFs).
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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Discussion
Why no mention or use of any of Vanguard's various ETF offerings? In most cases the lowest fees available and for Flagship clients no commissions. Results in most cases are competitive on a lifetime basis.
posted 7 months ago by V Parachini from California
An excellent article, but the individual still has to determinr what his overall objectives are and which ETF's are most appropriate. This article should be read and reread.
posted 7 months ago by H Mc allister from Arkansas
Great Article!
I wish you could list all of the ETF's in a separate column so that I can copy them and paste them directly into my trading software .
posted 7 months ago by Joe Petti from Connecticut
Some good specific suggestions of ETFs for specific purposes. Discussion of Vanguard ETFs would be useful
posted 7 months ago by Thomas Clasen from Virginia
Hi,
Real estate ETFs are included in the annual ETF guide, which is also in the August issue. They are also discussed in the September Journal, which will we have up soon.
-Charles
posted 6 months ago by Charles Rotblut from Illinois
