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The many stocks that are winning: Inverse & Sector ETFs

February 25, 2009

I like to log into my Zecco trading accounts a couple of times a week pretty much to shed a tear over fresh loses in my IRA. I try not to become to absorbed in short-termist thinking (let’s not even get into my ‘fun’ account here) but sometimes I’ll decide that one stock’s future losses in this environment will be worse than a different stock’s performance, so I suck it up, sell and re-invest somewhere else. Last week I sold YUM in favor of buying another food company. Haven’t decided yet. Maybe I’ll just buy BRK and let Warren Buffet do the thinking for me…

It’s been said that a bet against the US stock markets is  a bet against our country’s future. It’s also been said that the safest ‘bet’ is in a simple old index fund, especially one that tracks the overall market (like VFINX). But you can only buy that through a broker, which of course will cost you fees and you can only buy/sell at its closing price on any one day. ETFs, or Exchange Traded Funds, can be bought and sold from your brokerage account during market hours and perform like a mutual fund in your 401k; the stock’s price moves in sync with the prices of the stocks it tracks.

What happens when pretty much all the funds are going down? Welcome Inverse and Sector ETFs into your portfolio. I don’t take credit for the idea. When I read an article published by Chris Rowe in The Tycoon Report that explained his calculation that the actual fair value of the  S&P 500’s Price to Earnings ratio is still much lower than investors are trading, I figured I’d bite and instead of leveraging money (“margin”) I don’t have using put options. So I bought shares of an inverse ultra-short ETF called SDK, which is worth proportionately opposite value of the mid-cap stocks it tracks. With market investors not having made up their mind, this what SDK looked like the past few weeks (I’m also showing mid-cap ETFs it almost mirrors):


An ETF is an “Exchange Traded Fund,” so think of assuming that your 401k’s mid-cap mutual fund will go down. In a 401k though, you’re limited to what you can buy and sell (especially to avoid having your assets frozen by market-timing maneuvers). And you can’t buy/sell regular stocks or options. So, in your IRA or “for fun” money, you can go ahead and make these purchases. Or, you could become a student of sector rotation and purchase shares of an ETF that tracks stocks in agriculture, commodities, retail…it’s a long list. And supposedly, “there’s always a bull sector.” Again, why I use Zecco is the minimal trading fees. If you’re with a service like Fidelity, you’re paying what, $19 a trade deducted out of your IRA?

With updated figures for the 3rd quarter of 2008, Chris now estimates that the P/E of the S&P should stand between 10 and 15, not the current 30 times earnings. But that is the S&P and not all sectors. With stories like these updates that get posted throughout the day make me feel a bit better about my retirement fund, and actually about the market overall. I mean, what’s better than fair value for people who want to continue to invest?

If you can’t stand investing in any market now, then why would you even live here or keep your money in Dollars?

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