Leveraged ETFs – What Golf Teaches Us About Leveraged ETFs
Golf is one of my favorite sports. In my opinion, it’s the best way to get outdoors and enjoy (nicely manicured) nature.
I’ve been hooked since childhood.
Some of my earliest memories are of a father/son golf tournament. It was held at the local 9-hole golf course in my home town every year on Father’s Day. The day started early but I was usually so excited I hadn’t slept much anyway.
The day was filled with golf, sun, burgers, and my favorite, golf carts. It’s amazing how a few childhood experiences have kept me ‘swinging the sticks’ for all these years.
It wasn’t a coincidence I chose to move to Arizona. There are more golf courses here than I care to count.
It’s no surprise I spent a good part of my Father’s Day in front of the television with my Dad and son watching the US Open golf tournament. As we watched the drama unfold, I was reminded of the similarities between golf and investing.
This year’s winner is a relative unknown.
But the real drama didn’t come from the winner. It came from another unknown player who finished in a tie for second, Ricky Barnes.
Ricky was playing the best tournament of his life. He was leading our national championship with one round to go. He had momentum and it looked like he might run away with the tournament.
But then he made one bogey and another and another. He couldn’t regain his mojo. Eventually, he made a bogey on 6 of the next 8 holes. It was fascinating to watch him battle his emotions. But unfortunately for Ricky, the momentum of a few bad holes snowballed into a downward spiral.
He eventually pulled himself out of the slide, but it was too little too late. He finished two strokes behind the winner.
Right now, I see the same thing happening in the stock market.
Just like Ricky, the stock market was flying high. Better than expected economic data fueled a 40% gain in the S&P 500. But now, economic data isn’t able to produce the better than expected results.
The market’s lost its bullish momentum.
If economic data doesn’t provide a few positive surprises soon, the bearish momentum will build. It will be difficult to stop the downward spiral.
The parallels are easy to see, golf and investing are both subject to momentum and emotion (fear or greed).
The good news is we’re investing not golfing. And there are a couple of key differences. Golf is played over a set number of holes. The timeline for investing goes on forever. There’s always time to adjust your strategy to profit from the emotion controlling the market’s momentum.
The other key difference is golfers only benefit from positive momentum. Investors can benefit from good (bullish) and bad (bearish) momentum.
One way you can profit from swings in market momentum is Exchange Traded Funds (ETFs).
As you know, ETFs give investors the ability to buy entire markets, sectors, or industries, in a single purchase. This is an ideal way to play swings in market emotion. There’s no need to know company specific data. You only need to know what’s in or out of favor.
Often times, in favor and out of favor stocks are divided along sector lines. This makes it easy to spot leaders. During times of bullish momentum, the leading sectors rack up gains much faster than the rest of the market. And when bearish momentum is controlling the market, these sectors rack up losses much faster.
Right now the market is set up to move lower on bearish momentum. The consumer services sector is the weakest sector. It posted the biggest losses over the last few days. It could continue to lead the market lower.
One ETF provider makes it simple to profit from changes in market momentum and sector leadership.
ProShares’ line of ‘Ultra’ ETFs are ideally suited to a momentum strategy. They have twelve long and short ETFs matched up along sector lines. They give investors the ability to take a bullish or bearish position in a single purchase. No short selling or options required. (It doesn’t get much easier than this.)
Ultra ETFs also have leverage built in. The leverage causes the ETF to move twice as much as the sector. In essence, every 1% the market moves, the ETF moves 2%. As you can see, playing momentum swings with leveraged ETFs can double your profits. It’s no wonder leveraged ETFs are growing in popularity every day.
The ProShares Ultra Short Consumer Services ETF (SCC) should be the big winner if the market takes another leg down.
The bottom line – investing, like golf, is difficult to master. But if you pay attention to the emotions and the momentum, you can make intelligent assumptions about the market. And it doesn’t hurt to use a little leverage to make your hard work payoff.
Category: ETFs
