A Quick and Easy Way to
Hedge Your Portfolio

By Rick Pendergraft

With turbulence entering the investment picture over the past few weeks, some of our readers may be looking for a way to hedge their portfolios should this be the beginning of a bear market.  Whether this is simply a short-term correction or the start of a long-term bear market remains to be seen, but having a little insurance in place could be very prudent.

I have mentioned exchange-traded funds (ETF) many times in my articles before, but today I want to introduce you to a different class of ETFs.

I am talking about ETFs that move inversely to an underlying index or sector.  These funds are designed to go up in value when the price of the index falls.  These ETFs thus make it very easy to place a bearish bet on any number of indices or sectors.  Some of them are even leveraged such that they double the move of the index (i.e., if the Nasdaq goes down two percent, the ETF goes up four percent).

I put together a list of these “double inverse” funds to consider if you’re in need of hedging your portfolio.  All of these funds are part of the ProShares group of ETFs. 

UltraShort QQQ ProShares (QID)
UltraShort Dow30 ProShares (DXD)
UltraShort S&P 500 ProShares (SDS)
UltraShort Russell 2000 ProShares (TWM)
UltraShort Semiconductors ProShares (SSG)
UltraShort Financials ProShares (SKF)
UltraShort Basic Materials ProShares (SMN)
UltraShort Technology ProShares (REW)

This is just a general list and not necessarily a list of ones to rush out and buy.  However, if your portfolio is heavily weighted toward a particular sector, you may want to look into a fund that moves inversely to that particular sector.  For instance, if your portfolio is heavily weighted with financial stocks, purchasing some SKF shares would serve as protection should the financial sector make a sharp move lower.

This is not a complete list of the funds offered by ProShares.  The complete ProShares list of ETFs is available at http://www.proshares.com/funds .

Using a small portion of your portfolio to hedge against declines may seem odd, but look at it like insurance.  Most of us aren’t happy about paying the premiums because it seems that we never use the policy.  But when you have an accident or get sick, you’re very grateful to have that protection.  The same principle applies to your portfolio.

Happy Trading,

Rick

[Ed. Note: Rick Pendegraft has become a recognized expert at combining fundamental and technical analysis with the careful study of investor sentiment. To put his 20 years of market success to work for you, please consider his Triple Wave Investor advisory service. Click here to learn more]

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Market Watch

Another Busy Week on the
Economic Calendar

By Rick Pendergraft

It will be another busy week for economic data, with a flood of economic reports due out on Thursday and Friday.  Perhaps no two reports will affect the market more than the Producer Price Index on Thursday and the Consumer Price Index on Friday.

These two inflation gauges have been in focus for quite some time, and their importance hasn’t diminished given the recent correction in the market.  Fed watchers may use the recent pullback in equities as a reason for the Fed to cut rates, but the Fed has previously stated that the stock market is not one of the gauges they use to dictate monetary supply policy.

With recent data showing an economy that continues to weaken and inflation not going away as most had hoped, the Fed finds itself in a precarious position.

Two other reports that are bound to garner investor attention are the New York Empire State Index and the Philly Fed Survey.  Both reports measure current and future economic activity, but expectations are a little different for the two.  Analysts are expecting the NY Index to come in a little lower than last month, while the Philly Survey is expected to be a little better. 

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