This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Paired ETFs Strategy Can Smooth Volatility

Given the recent stress test in the market, I thought it might be worthwhile to revisit an ETF strategy I explored last month : pairing a sector ETF with an inverse sector ETF so that the long holding went up a little more than the inverse ETF went down as the market moved higher over time.

The idea was to reap price appreciation of a few percent and some yield from both holdings. The goal was to try to capture most of the market's return with only a small fraction of the risk.

It seems to have delivered the desired results. Even better, it can work for several sectors, and may find more applications as ETF offerings expand.

In my initial column, I looked at the usually high-yielding financial sector. I paired the WisdomTree International Financial Sector Fund (DRF) with the ProShares UltraShort Financials Fund (SKF), and looked at putting $20,000 into DRF and $10,000 into SKF.

If an investor had entered this pair on Feb. 26 (the day before the big dip started) at the open, he could have bought 698 shares of DRF at $28.62 and 145 shares of SKF at $68.58, making the invested amount $29,920.86. At the close on March 9, two weeks later, DRF closed at $27.43, down 4.1%; SKF closed the same session at $74.39, up 8.4%.

In dollars and sense, the combo was worth $29,932.69, up $11.32. During the same two-week stretch, the S&P 500 was down 3.3%. I'd say that judging by this small sample, the concept seems to work, and it sure was tested during that particular "dip."

Quite a Test
The financial sector ETF pair trade survived the market's meltdown
Source: BigCharts.com

The concept stands up (so far, anyway) in other sectors, such as the utility sector. Take a look at the pairing of the WisdomTree International Utilities Fund (DBU) and the ProShares UltraShort Utilities Fund (SDP) during the same time frame and investment size:

Utilitarian Pairing
This combination would've worked well, too
Source: BigCharts.com

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,583.95 +227.08 1.31%
S&P 500 2,043.34 +30.45 1.51%
NASDAQ 4,717.4370 +73.1250 1.57%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs