Home > Creativity, Markets > Profitable ETF Trading Techniques: Hedging your long term portfolios with ETFs

Profitable ETF Trading Techniques: Hedging your long term portfolios with ETFs


The long term advantages of a buy and hold strategy are well known, and well supported by scholarly research.  However, there are some simple, effective things you can do during confirmed bear markets that can bring you peace of mind, protect your long term positions, secure your retirement, and protect you against the most visious of bear markets.  Exchange traded funds turn out to be excellent tools to accomplish these purposes. 

Here are some ideas for you to consider with your financial advisor.  Please remember that these comments are generic, and do not constitute investment advice.  Investing has inherent risk, and you must do your own due diligence

Bear markets are relatively infrequent, but the selling pressure can be painful and have long term impacts on your bottom line. This is especially challenging fro peple approaching retirement who may have been counting on normal bull market returns to help them achieve their financial objectives.  How can you recognize a bear? What can you do about it?

The simplest method of identifying a bear market for purposes of this discussion is to use a simple rule of thumb favored by institutions. It’s important to look at tthe the market througy the eyes of institutional money so that you are prepared to take advantage of the trends established by large money flows. 

On any free charting service, like Yahoo Finance or MSN Money, you can track the 200 day moving average. When price closes below the level of the 200day Moving Average, you can treat the market condition as bearish.  Studies have shown that the average return of stocks and the market are noticeably lower during periods when price is below the 200day moving average.

What can you do?

Consider hedging your long term positions by suspending the purchase of additional securities, and rather, place that money in an inverse market ETF, like  DOG, which is the inverse of the Dow 30 industrials.  This position will make money when the market goes down, and serve to offset the losses from the long positions in your portfolio.  This one act alone will tend to smooth out your equity curve.  When price comes back above the 200day moving average you would close the short position (or inverse ETF position) and return to a long only posture.  In this manner you can smooth out the periods of market underperformance.

There are other more sophisticated shorter term strategies available to more active traders, but this idea will give you a start on your research.

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