This Day On The Street
Continue to site
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

Hedging With Spread ETFs

NEW YORK ( TheStreet) -- One of the positive attributes of the ETF industry is that it offers access to segments of the market and sophisticated strategies that would not be easily accessible for the majority of market participants. The most recent product line from the "sophisticated strategies" realm comes in the form of so-called spread ETFs from FactorShares.

  • FactorShares 2X: S&P 500 Bull/T-Bond Bear (FSE)
  • FactorShares 2X: S&P 500 Bull/US Dollar Bear(FSU)
  • FactorShares 2X: Oil Bull/S&P 500 Bear(FOL)
  • FactorShares 2X: Gold Bull/S&P 500 Bear(FSG)
  • FactorShares 2X: T-Bond Bull/S&P 500 Bear(FSA)
  • The basic idea is that the funds capture the spread between the asset classes listed in the name of the fund. For example the 2X: S&P 500 Bull/U.S. Dollar Bear would go up when the S&P 500 outperforms the U.S. dollar. This could occur by virtue of SPX going up when the dollar goes down, the SPX going up more than how much the dollar goes up or the SPX going down less than the dollar -- any of those scenarios and FSU would go up.

    Going a little deeper, all of the funds are levered 2 to 1 by the use of futures contracts such that if the S&P 500 outperforms the U.S. dollar by 1% the S&P 500 Bull/U.S. Dollar Bear should go up by 2%. Given some of the huge moves lately in crude oil, the 2X: Oil Bull/S&P 500 Bear stands to come out of the blocks as being very popular and very volatile should the news moving that market persist. The expense ratio of the funds is 0.75%.

    Another point of understanding is that these funds offer a daily reset, their respective objectives are on a daily basis which requires the buying or selling of futures on either side of the spread to have the best chance of meeting the daily objective for each fund. Assuming FactorShares can execute the daily reset correctly then the funds should do what they are supposed to do on a given day. As we have seen with leveraged funds from other providers, this does not mean that these funds will capture their stated objective over any longer period of time.

    The most glaring example of a fund "not working" over a long period of time might be from 2008 when the iShares DJ US Real Estate Fund (IYR) was down 44% and the ProShares Ultra Short Real Estate (SRS) was down 52%. However, over the last 12 months, IYR was up 36% and SRS was down 61% which is pretty close. The point here is that there is no way to know what a levered fund will do over any time frame longer than the stated objective, it all depends on the combination of up and down days which is of course not knowable in advance.
    1 of 2

    Check Out Our Best Services for Investors

    Action Alerts PLUS

    Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

    Product Features:
    • $2.5+ million portfolio
    • Large-cap and dividend focus
    • Intraday trade alerts from Cramer
    Quant Ratings

    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
    Stocks Under $10

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

    Product Features:
    • Model portfolio
    • Stocks trading below $10
    • Intraday trade alerts
    14-Days Free
    Only $9.95
    14-Days Free
    Dividend Stock Advisor

    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
    • Updates with exact steps to take - BUY, HOLD, SELL
    Trifecta Stocks

    Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

    Product Features:
    • Model Portfolio
    • Intra Day Trade alerts
    • Access to Quant Ratings
    Real Money

    More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

    Product Features:
    • Access to Jim Cramer's daily blog
    • Intraday commentary and news
    • Real-time trading forums
    Only $49.95
    14-Days Free
    14-Days Free
    FOL $0.00 0.00%
    AAPL $93.74 0.00%
    FB $117.58 0.00%
    GOOG $693.01 0.00%
    TSLA $240.76 0.00%


    Chart of I:DJI
    DOW 17,773.64 -57.12 -0.32%
    S&P 500 2,065.30 -10.51 -0.51%
    NASDAQ 4,775.3580 -29.9330 -0.62%

    Free Reports

    Top Rated Stocks Top Rated Funds Top Rated ETFs