By Michael Johnston of ETF DatabaseThe first half of 2010 is officially in the books, but few of the questions on investors' minds at the start of the year have been answered. When 2009 drew to a close, few expected the remarkable rally to continue into the new year. The consensus was that the easy gains had been made since the bear market lows last March, and that markets would demand more concrete evidence of improving economic fundamentals if the bull run were to continue. The first six months of the year have given investors several reasons to be optimistic; the emerging markets of the world continue to expand at impressive rates, while many advanced economies -- including some of those hit hardest by the recent downturn-have halted contraction and begun growing again. Factories are coming back on line, and demand for raw materials has jumped considerably from 2009 lows. But signs of trouble are abundant as well. Unemployment remains elevated not only in the U.S. but throughout much of Europe as well. The recent G-20 summit in Toronto revealed major divisions among the governments of the world; the U.S. is advocating continued borrowing and stimulus spending, while Europe is preparing to impose harsh austerity measures to combat worries of a sovereign debt crisis. And many of the largest emerging markets, which not so long ago seem to be unstoppable drivers of growth, are showing signs of slowing down. In short, the outlook for the remainder of 2010 is clouded with uncertainty. Against this complex and often contradictory backdrop, many investors are unsure of exactly how to proceed. Many of those with the appetite for a little risk are turning to long/short investment pairs that have the potential to generate positive returns regardless of the general direction of the markets. For investors uncertain of what the future holds, we outline three all-ETF long/short investment ideas for the second half of 2010.
1. Long EEO, Short XLEOne of the dominant stories of 2010 has been the ongoing drama playing out in the Gulf of Mexico. When a BP platform collapsed in late April, few could have anticipated that the resulting leak would pump oil into ocean waters for several months, repeatedly frustrating teams of engineers, government officials, and members of the Coast Guard working around the clock. The fallout from one of the worst environmental disasters in U.S. history has weighed heavily on shares of British oil giant BP, which has seen more than $100 billion of market cap losses. But it has also cast a shadow over the entire U.S. oil industry, which faces rising public outrage and the prospect of unprecedented government interaction.
2. Long XLF, Short EUFNOver the past few years, few sectors of the global economy have exhibited the volatility that has become characteristic of the financial industry. Although many institutions have repaid the emergency government funds borrowed during the depths of the recession, concerns about stubbornly high unemployment, a potential commercial real estate bust, and over-leveraged households have weighed on the financial sector. Public mistrust of big banks remains high, and it seems unlikely that the glory days of Wall Street will return any time in the near future.