Date published: 3/16/2009

  Profit With Insight                                                                                                     April 2009

The Basics Of Short And Leveraged ETFs
By Simon Maierhofer, Co-Founder
 
Ever since the market meltdown started, short ETFs have become the most talked about investment vehicle. Some love 'em, others hate 'em.
    The bottom line for many investors is that short ETFs are the only way to take advantage of a falling stock market. Retirement accounts, such as IRAs, Roth IRAs, SEP IRAs, 401(k)s and others do not allow shorting stocks or ETFs. Therefore short ETFs are the default option for many investors to profit in a down market. 
    This article will analyze the performance patterns along with the strengths and weaknesses of short and leveraged ETFs. It will also dispel

some myths and provide a closer look "under-the-hood."
    Jim Cramer seems to be on a one-man crusade to get short ETFs banned. Why? He claims that short financial ETFs are at fault for driving down the prices of financial stocks.
    We've come to know that everything Jim Cramer says needs to be taken with a grain of salt. Wasn't he the one who said: "Very simply, I believe it's time to buy, buy, buy!" in October 2007 and June 2008? Ironically, short ETFs are the only asset class to make money since he told investors to buy.
    Do short ETFs really skew the performance of the stock market, the financial sector in particular? Let's      

take a look at the facts. Against contrary beliefs, short ETFs do not short the underlying securities. The inverse performance is attained via a mix of futures contracts and swaps, not by short selling the underlying stocks.
    Even if short ETFs would short stocks, a quick tally of assets under management shows that short financial ETFs account for a total of only $1.17 billion while leveraged long financial ETFs make up $2.65 billion.
    If Mr. Cramer's theory was correct, ETFs would actually buoy the financial sector. Myth busted!
    Nevertheless, the fourth quarter did
                                (Continued on page 2)

    Market Meter (The U.S. Equity Markets At A Glance) - See page seven for an expanded Market Meter

 

Short-term: It appears that the final leg down to reach a temporary bottom is still missing
Mid-term: Once a temporary bottom is confirmed (ideally around Dow 6,300), the stock market should stage a multi-month rally
Long-term:  The bear market will resume once the above mentioned rally is exhausted 

Knowing Your Options - Part II

By Ron DeLegge, Editor  

In last month's newsletter, we covered the basics behind ETF options. We analyzed using options for insurance and selling covered calls to generate additional income. Whether you decide to make use of either one of these two investment strategies will largely depend on 1) your level of financial sophistication and 2) your own unique financial goals..
    I hope we've impressed upon you one of the principle advantages of ETFs: their financial flexibility. As you read, we are enduring the kind of stock market and economic environment where all investors need every little

advantage they can get. Not having intraday liquidity and not having underlying options are two major shortcomings of mutual funds. Even if you never ever decide to take advantage of ETF options strategies, as an ETF shareholder, you have this weapon in your arsenal. It's there for you. Use it anytime you want. Or don't use it anytime you want. It's up to you.

OPTIONS FOR LEVERAGE
    Today, most of the focus on ETF leverage is within the confines of leveraged ETF families like the DirexionShares or ProShares. As most of you already know, these are funds that attempt to magnify their 

daily gains by two or three times whatever benchmark they're linked to. Such funds use a variety of financial instruments to obtain their                                 (continued on page 6)

In This Issue...

The Basics Of Short ETFs - p. 1 - 4
Knowing Your Options - p. 1, 6
Short ETF Reference Guide - p. 5
New ETF Launches - p. 8
Expanded Market Meter - p. 7
ETF Profit Strategies - p. 7, 8
Performance Corner - p. 9

All rights reserved. Copyright © 2009 The ETF PROFIT STRATEGIES NEWSLETTER is published monthly 12 issues per year by ETFguide, LLC. No part of this publication may be reproduced in any form or by any means without the prior written permission of the publisher. Subscription price (2009) $149.year.