There are a wide variety of active risk management strategies. None of them are fool-proof.
The one that we advocate — stop-limit loss orders — may have adverse tax consequences; the stop may also fail to execute in a rapidly declining market.
OptionsÂ and futuresÂ investors cheer the “out-of-the-money” puts. This has the benefit of an insurance policy, though it may feel like wasted money if a calamity doesn’t occur. Moreover, if a put order isÂ only placed onÂ SPDR S&P 500 (SPY), you may not beÂ protectingÂ a well-diversified portfolio with lower-correlating assets.
Inverse ETFs are popular with traders. Yet there’s an incredibly poor understanding of daily compounding versus annual compounding. For instance,Â iShares DJ Real Estate (IYR) fellÂ -40% in 2008. Many whoÂ chose ProShares UltraShort Real Estate (SRS) believed thatÂ the 2x-the-inverse-fund should have garnered themÂ 80% for being on the right side of the trade.Â Being on the proper side of the real estate trade with SRSÂ resulted in a loss of -50% — not a gain of 80% — due the differences between daily and annual compounding.
There are other alternatives as well… and the idea has been picking up steam. There are a number of folks who invest in volatility, which tends to spike dramatically in major league sell-offs. The gains can go a long way to protecting a chunk of one’s principal. Yet even these relatively new tools have their drawbacks as well.
Volatility ETFs: The Real Safe Haven?â€“ Jared Cummans, ETFdb
Bear Roars For SPYâ€“ Benzinga
Other Bond ETFs Lag Treasuries; BAB A Buy â€“ Murray Coleman, Barronâ€™s Â Â
ETF Spotlight: United States Commodity Indexâ€“ Abraham Bailin, Morningstar
Avoid Racing For The Sidelines: Spread Out Risk, Disregard Emotional Swingsâ€“ Kevin Prendergast, Seeking Alpha Â
Disclosure Statement: ETF ExpertÂ is a web log (â€ťblogâ€ť) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert disclosure details here.