There has been a lot of talk (more & more) about banning Leveraged ETF's (LETFS) lately. This bothers me as it is like saying ban options since the majority of options traders loose money. I say don't blame the leveraged ETF's if they implode your account, blame bad trade management and discipline. This post is about how I use leveraged ETF's to hedge my portfolios.
I do not short individual stocks because I trade mostly in accounts that do not allow for that. Having run a Long / Short hedge fund, I have grown accustomed to being able to hedge. For me, the LETFS allow for that in almost a perfect fashion (Yes I am aware of their leakage AND YOU SHOULD BE AS WELL).
I find that a weighting of between 10%-30% LEFTS against the remaining portfolio in HIGH BETA stocks has worked like a charm for me. It is fun to watch the transition intraday especially on turn (non-trend) days in the market. First I watch my portfolio value turn red as the market sells off, but then *bingo* it turns green again should the market sell off significantly.
This sort of hedging is my preference for a few reasons. Firstly, I am more of a trend trader, than a day trader. I scale in to a position over a period of weeks, and scale out accordingly. Though I do use trading stops, the LETFs allow for me to stay in a stock if IT looks technically ok, but perhaps the overall market does not.
Another reason I like the ETFs hedging is that we are currently at an inflection point in the markets. I (and likely you) could easily make both a bull case, or a bear case from these levels (S&P 1000). So while I used the LETFs back in March to make a leveraged directional BULL bet on the banks (300% + return on FAS), I am now mostly using them as a short hedge. If you have followed me on Stocktwits, you will note that I have been entering the LETF shorts in the past two weeks for the first time aggressively since May 2009. I do not do this blind, and I have been stopped out on more than one occasion recently. If you DO follow my Stocktweets, it is important that you know that although I might be short term bearish, I am still long VERY high beta stocks currently - and am still a longer term bull.
Happy trading - @A_F