The Best ETF For 2010
Happy Holidays! As ’09 draws to a close, it’s time for many investors to retool their holdings for the New Year.
Whether its tax loss harvesting or evaluating what worked this year… Well, let’s just say there’s plenty to do. I’ve spent a good deal of time looking at my own portfolios. I found one ETF I think every investor should consider adding to their holdings… but first, a quick look at what’s in store for the markets in 2010.
First off, we’re not going to see +60% gains in the S&P 500 like we have from the March bottom this year. And I wouldn’t be surprised if the S&P 500 comes up short of the +20% gains it’s posted for the entire year.
Believe it or not, any way you slice it, ‘09’s been a good year for stocks overall.
The impressive market gains have sent the majority of stocks up. That means by simply owning a broad based ETF like SPDR S&P 500 ETF (SPY), you were able to capture some nice profits. And that’s a good thing. Many long term investors and retirement funds are tied to US large cap stocks.
The key to the market in 2009 was being brave enough to keep your money in the stock market when our economy was being ripped apart by the credit crisis. It wasn’t an easy thing to do!
2010 will be different. It boils down to the markets returning to a more ‘normal’ environment. And by that I mean stocks are going up or down based on fundamental data, not hope.
Solid stocks with growing revenue and earnings will go up. And stocks with declining revenues and earnings will go down.
So don’t be surprised to see smaller overall market returns and fundamental data driving individual stock prices higher or lower in 2010.
With that in mind, I think one hedge fund strategy should outperform the broad based ETFs like SPY.
It’s the 130/30 strategy.
A 130/30 strategy takes advantage of both negative and positive expectations for stocks. And as fundamental data drives individual stocks higher or lower, this strategy should do well.
This strategy uses shorting and leverage. That’s why it has the potential to outperform the markets. Let me explain.
Here’s how these funds do it.
The first step to putting a 130/30 strategy in place is to buy an index of stocks like the S&P 500. This is similar to buying an ETF like SPY.
Then, fund managers short 30% of the stocks with the lowest expectations. In other words, stocks you expect to fall because of their fundamental data.
By selling stocks short, additional funds are created. The final step is to take the additional funds from shorting stocks and invest it in the best stocks of the group. Essentially doubling down on stocks they expect to perform the best.
This strategy has been used for years by intuitional investors and hedge funds. And they’ve often made money hand over fist! It’s designed to outperform a long only portfolio and with the same amount of risk!
You might be thinking that’s great but it sounds like a lot of work to set up properly. You’re right… or at least you were until earlier this year. You see, ProShares launched an ETF that follows a 130/30 strategy in July of ’09.
It’s the ProShares Credit Suisse 130/30 ETF (CSM). By adding CSM to your portfolio, you now have access to a tool long reserved for a select few! And it just takes a few clicks of your mouse to buy it!
In five short months since CSM launched, it’s up 14.5%. Over the same period, SPY is up 12.7%. The 130/30 strategy is outpacing a long only strategy by 1.8%.
Now there is a down side. If the fund manager picks the wrong stocks to short or double down on, the strategy could underperform a long only strategy. But so far their system of selecting stocks has led CSM to outperform SPY.
The 130/30 strategy is incredible. You can squeeze higher returns out of your investments without increasing risk. Sounds like a win-win situation to me.
Category: ETFs
