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Bleak-Time ETFs: Go Long Banks, Short Growth

In these uncertain times, investors can bet long banks and against U.S. economic growth with these two ETFs. Here's the play.
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Having problems understanding anything to do with the markets right now? You are not alone. Ratings team has sorted through the exchange-traded funds that received the biggest upgrades from us this month and found that for these hellfire times, two strategies may still hold for the near future:

  • Go long the financial sector with the KBW Regional Banking ETF (KRE) - Get Free Report; and
  • Go short the Russell 2000 index with the ProShares Ultra Short Russell 2000 Growth (SKK) , which seeks investment returns that correspond to twice the inverse of the daily performance of the Russell 2000 Growth Index.

As every government on earth shells out copious amounts of taxpayer money to save the global banking industry from the greed and incompetence that marked it for most of the decade, it makes for a perfect opportunity for investors willing and able to take the risks to profit and recoup some of their tax dollars from any rally in bank stocks.

It makes sense for investors to take a long-term position in bank stocks because they have been beaten down to such an extent that there are only two options left for any bank: 1) survive and increase in value in the next two to three years or 2) fail.

By using a diversified fund like the KBW Regional Banking ETF, investors can mitigate some of the risks associated with those banks that fail and yet profit from those that will survive and prosper. It is likely that the banking sector will have problems for most of 2009, so this sector will be volatile. However, if investors park money for the long term, then rewards will present themselves as the credit markets stabilize and recover.

On the short side, the words "growth" and "U.S. economy" offer a contradiction in terms. There is no growth, and, in fact, the U.S. economy is likely to shrink noticeably. With this in mind, shorting growth stocks offers an opportunity to profit from economic weakness going forward.

ProShares Ultra Short Russell 2000 Growth can provide such a vehicle to do this, and it does so with an all-or-nothing approach, or more aptly put, a double-or-nothing approach. It seeks to magnify any downward movement in the Russell 2000 Growth Index by a multiple of two.

So the strategy is to go long banking and short growth.

Sam Patel, CFA, is the manager of mutual fund research for the Ratings.

In keeping with TSC's Investment Policy, employees of Ratings with access to pre-publication ratings data must pre-clear any potential trade through the legal department, and are prohibited from trading any security that is the subject of an unpublished rating revision until the second business day after the rating is published.

While Patel cannot provide investment advice or recommendations, he appreciates your feedback;

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