ETFs

ETFs have evolved in impressive ways since they came to the market, says Doug Fabian, who explains two ETF vehicles that would have been unthinkable a few years ago.

Innovation in the world of exchange traded funds. Doug Fabian is here and Doug, innovation, how could that be?

Well, Ray, I'll tell you. When I first invested in an ETF, the year was 1997, I bought SPY, which is just the S&P 500, and there were four or five ETFs on the marketplace. Today, there are over 1,200 exchange traded funds, getting investors access to all kinds of investment opportunities around the world. So the ETF industry has evolved tremendously in the past ten years.

Let me give you a couple of examples. One exchange traded fund is a play just on shorting stocks. It's almost like owning a small hedge fund. The ticker symbol is AdvisorShares Active Bear ETF (HDGE). Hedge is the idea, and it's an actively managed ETF.

Most people think of ETFs as indexes-The S&P 500 or the Dow Jones Industrial Average or small-cap stocks, but here is a new innovation where you have the liquidity and the transparency that we all love about exchange traded funds, and low expenses, and now you can now hedge off stock market risk with that particular product.

Another innovative ETF strategy...is the VEQTOR Exchange Traded Note (VQT). This ETF uses the S&P 500, kind of invests like SPY, but it hedges off of risk. It has an automatic stop-loss of 2%. So if the market falls 2%, it goes to cash, and then it buys volatility.

So last August 2011, when the market fell 18% in three weeks, this portfolio went from 97% long in stocks, switched to cash, then went essentially short the market because it bought volatility. And it went up 8% when the market fell 18%, and then when the volatility settled down, it just started going up again like the S&P 500.

It's quite an innovative investment strategy that they're employing that allows an investor to own something where they don't have to worry about the bottom falling off any one day. That's another innovative way that ETFs are being used.

You have a recurring theme here: volatility can be used as an advantage.

Absolutely, absolutely. And I believe volatility is kind of here to stay. So investors need to be looking for solutions that allow them to sleep well at night, and not deal with so much volatility in their portfolio, because they end up getting scared out of the market at the worst possible time.

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Tickers Mentioned: HDGE, VQT

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