ETFs For Momentum Investors

As Wall Street continues to try to get a proper footing, stocks and exchange traded funds (ETFs) keep on riding the prevailing trends of weakness, but there are some investment tools that are gaining some momentum.

Short ETFs are gaining some positive ground in the early part of 2009 and they may complement a portfolio strategy if properly used, writes Ron DeLegge for ETF Guide.

But it is noted that a potential investor needs to fully comprehend how the products work. Because of expense ratios, tracking error market forces, and the product structure, the performance of short ETFs would almost never mirror the percise opposite returns of their corresponding indexes.

Momentum investors aim to capitalize on the continuance of existing trends in the market, and believe that large increases in the price of a security will be followed by more gains.

If this is your style, DeLegge notes the following ETFs:

• Short S&P 500 ProShares (SH): Up 2.6% in the last month. The ETF is designed to show the daily inverse performance of the S&P 500 stock index (^GSPC). In the last 52 weeks, the S&P has been battered by its exposure to financial and technology stocks. The short ETF tries to deliver twice the opposite daily performance of the Dow Jones U.S. Financial Index. This index includes stocks of banks, insurance companies, and securities brokers.

• UltraShort Financials ProShares (SKF)

• UltraShort Real Estate ProShares (SRS): Up 3.5% in the last month. This short ETF tries to translate twice the opposite daily performance of the Dow Jones U.S. Real Estate Index.

Our strategy notes that it’s time to get out if an ETF falls 8% off its high or falls below the 200 day-moving-average. This way losses are kept to a minimum. When a fund crosses above its 50-day moving average, put 25% of the value into your portfolio. When the fund goes up 5%, put another 25% in. It is important to take note that a trend is always in the making somewhere.

Subscribe by RSS Subscribe by Email