With a possible recession looming Market Flavor would like to share an easy hedging strategy to help protect your stock portfolio. Hedging can sound like a scary and complex term, but we are going to show you that hedging can be made simple. Investopedia defines a hedge as “Making an investment to reduce the risk of adverse price movements in an asset.” This means investing in an asset that moves in the opposite direction of your stock portfolio. Often during a stock market crash or an economic recession, investors will protect their portfolios by shifting assets into safer investments to minimize losses. For more protection we suggest buying shares in an Ultra Short ETF.

You might be wondering what an Ultra Short ETF is. First lets define an ETF. An ETF (Exchange Traded Fund) trades on the stock market like an ordinary stock, but actually represents a basket of stocks. It’s very similar to a mutual fund, but easier to buy and sell. An ETF can also cost less then a Mutual Fund. Ultra Short ETFs are comprised of short positions in multiple stocks. A short position in a stock means you make money if the stock goes down. Think of having a short position in a stock as the exact opposite of buying the stock. The Ultra means that the returns are double. Putting this all together, an Ultra Short ETF moves at an inverse relationship to the stocks it represents times two. The Ultra Short ETFs that we are recommending follow major stock market indexes like the Dow Jones 30 or the S&P 500. An example of how one of these ETFs work are if the S&P 500 went down 1% the Ultra Short ETF for the S&P 500 (SDS) would go up about 2%; the inverse times two.

Ultra Short ETFs can provide portfolio protection during an economic recession or a stock market crash. Say you think the stock market is heading down, but you don’t want to sell your stocks or you want extra portfolio protection. Most likely your stock portfolio will lose money during a recession or bear market. An Ultra Short ETF will make money during a market crash or economic recession, thus lowering your total portfolio loss. The more money you invest in an Ultra Short ETF, the more it will offset your losses and protect your portfolio. However, keep in mind that if the market goes up, an Ultra Short ETF will lose money and your portfolio won’t appreciate as much. This is because the Ultra Short ETF will decline in price. This is what a hedge does; it reduces your downside risk but limits your upside gains.

With the possibility of another stock market crash and an economic recession, using an Ultra Short ETF to hedge your portfolio is a smart idea. At Market Flavor our current stock market outlook right now is not very positive and have been recommending an Ultra Short ETF to our members. Sign up for a free trial and view all of the stocks in the Market Flavor portfolio. Let us help you successfully invest in the stock market!

Ticker symbols for Index tracking Ultra Short ETFs
Ultra Short S&P 500 - SDS
Ultra Short Dow Jones 30 - DXD
Ultra Short NASDAQ - QID
Ultra Short Russell 2000 - TWM

Tags:   Economic Recession   Hedging Strategy   Portfolio Protection   Stock Picks   ultra short etf   US Stock Market Crash  

Posted on March 18, 2007 4:35 PM | Digg | del.icio.us