Editor's Note: This story was originally published Sept. 19, 2003 on RealMoneyHow can you use exchange-traded funds, or ETFs? What does the future hold for this rapidly growing investment category? I'll do my best to address those two questions here.
Question: Could you please mention a few strategies using ETFs? Answer: The ability to buy, sell and short a diversified basket of stocks has many applications. It would be difficult -- if not impossible -- to try to list all of the ways that different investors can use ETFs. Instead, I'll highlight five common strategies.
- Long stock/Short ETF: In this case, you're bullish on a particular company in relation to the rest of the sector. By shorting a correlated ETF or HOLDR, you are essentially reducing the sector risk to some degree. For example, let's say you love Wal-Mart ( WMT), but you want to hedge your long position in Wal-Mart by shorting Retail HOLDRs ( RTH). With this strategy, you're basically betting that Wal-Mart will outperform a diversified basket of retail stocks. At the same time, because Wal-Mart is a
Question: I have been using fixed-income ETFs, which I think are a very innovative new product. You mentioned that a gold ETF was in the works. What other ETFs are in the pipeline that we may see in the future? Answer: The gold ETF is under review by the Securities and Exchange Commission. Additionally, according to filings, a number of other potential products also exist, some of which are still pending SEC approval.
- Fixed-Income iShares: one for exposure to Treasury Inflation Protection Securities (TIPS), and one for high-yield bonds. Leveraged Index ETFs: at least one fund holding short positions, sponsored by