5 ETFs to Ride the Market’s Uptrend

10/17/2011 7:00 am EST

Focus: ETFS

S. Wade Hansen

Founder and Managing Partner, Learning Markets

Investors with longer time horizons would be wise to check out some of the tried-and-true ETFs, says Wade Hansen. He advises investors to seek out funds with low fees and plenty of liquidity. He names several of his current picks for the nascent market rally.

Kate Stalter: Today I am speaking with Wade Hansen. He is the founder of learningmarkets.com and also a co-author of two books with very catchy titles—All About Investing in Gold and All About 4X Trading. I’m sure that will interest a lot of the listeners today.

Wade, obviously these are some asset categories that more and more investors, not even just traders, are looking to lately given all the market volatility. We’re on the investing channel here at MoneyShow.com. What is your view right now of the best action that investors should be taking?

Wade Hansen: Well, as investors look at accessing some of these markets that they haven’t typically had access to in the past unless they were futures traders. One of the great ways to approach them is through exchange traded funds or exchange traded notes.

You can gain access to virtually any commodity you’d like to, whether it’s gold or silver, or agricultural commodities, and you can gain access to just about any currency. You can play the dollar itself against a basket of currencies, whether you think the dollar is going to be going up or going down, or you can specify a little bit more and trade the euro versus the dollar, or maybe the Australian dollar versus the dollar.

You really do have quite a bit of access to these markets through exchange traded funds that you can trade in your IRAs, and it depends—some 401(k)s even offer access to some of these types of ETFs.

Kate Stalter: One of the things that a lot of folks are talking about lately, and I’m sure you’ve noticed it as well, is the correlation between various asset classes that in the past used to diverge more than they have been lately. Are there any particular notes of caution regarding some of the market correlation that we are seeing these days?

Wade Hansen: Well, you know, one of the things that all investors have really leaned on in the past to try and provide a level of safety in their portfolios is diversification.

What we saw with the financial crisis in 2008 is that even if you are well diversified, a lot of asset classes can start moving together. You’ll hear people say that the correlation moves to one. That happens when people get panicked, they get fearful.

If we look out into the horizon and say, you know, what are some of the things that we are still facing here with budget deficits in the US and the long-term debt, with the European debt crisis, and with the potential to slowing global economy? If we were to revisit a time like 2008, we’d probably see a lot of those correlations move to one.

In very normal market times, we do see some asset classes move independent of each other, and that’s a great reason to be diversified, but you do have to recognize that there are some moments that market volatility diversification can only get us so far. We do know that we still have exposure to these investments.

Kate Stalter: As I was taking a look at your Web site, Wade, a lot of the articles and the content you have on there, as you are teaching traders and investors, you seem to cover a range of investing and trading styles.

Give us some ideas that people perhaps with a medium- or a longer-term perspective might want to consider right now. You had mentioned ETFs. Any particular sectors, for example?

Wade Hansen: I guess with ETF investing, I would start with a caution first: If you look at the ETF universe, more and more ETFs are coming to market all the time, and some managers are bringing them out as actively managed ETFs.

They have ETFs at high leverage. They have inverse correlated ETFs. There really are a lot to choose from.

If you are just getting started and have a longer-term horizon, you definitely want to avoid these leveraged ETFs. They have a lot built into their structure that make them great trading tools for very short-term traders, but terrible investments for longer-term investors. As you are looking to maybe branch out into a few ETFs, and you do have a longer-term timeframe, you are going to most likely want to avoid these leveraged ETFs.

As you are looking at ETFs, what you want to find is one that has a nice low fee involved with it and plenty of volume and liquidity—you can go into and out of the ETF as you need to, moving forward. So, a lot of the more what you might call “vanilla ETFs” track indexes, track broad commodity classes, and may be the way to go for you if you are just getting started.

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Kate Stalter: Now, do you see these as longer-term plays, or something where people should really re-examine their holdings on a regular basis? Perhaps do some selling if that particular sector, for example, is no longer in favor?

Wade Hansen: What it all comes back to is what your time horizon is, and what you feel comfortable with.

If you are more of a buy-and-hold person, ETFs are great because you can get the diversification that you are typically looking for if you have a buy-and-hold portfolio. If you are more active in your trading, ETFs do give you the advantage of acting just like stock and being able to trade them throughout the day.

It’s not like a mutual fund, where you can only adjust your position at the end of every trading day. So, if you provide benefits for both types of investors, you really just need to decide what your timeframe is and what you are looking to do in your portfolio.

Kate Stalter: You know, for people who are interested, say, in the buy-and-hold and the index ETFs, any particular ones that perhaps they should take a look at?

Wade Hansen: There are a few. There’s the Spyder Trust (SPY) that used to be the largest ETF out there until it was recently eclipsed by the SPDR Gold Trust (GLD).

The SPY tracks the S&P 500 and the GLD tracks the price of gold, and as we all know, there has been a massive rush for people to move a portion of their assets into gold, and that is why GLD has taken off so well.

If you are looking for a little more exposure to say the commodity market, there is a great one, PowerShares DB Commodity Index Tracking Fund (DBC). It gives you a broad exposure to various commodity classes from energy to agriculture to precious metals that you can look at.

If you are looking to get involved in currencies at all, there are two ETFs, and they are sister ETFs. One is PowerShares DB US Dollar Bullish Fund (UUP), which tracks the value of the US dollar going up, and PowerShares DB US Dollar Bearish Fund (UDN) tracks the value of the US dollar going down.

So, if you are looking to make a play in the currency market, and you think the dollar is going to be going up, UUP is a great way to gain access to that. And if you think the value of the US dollar is going to be declining, UDN is a great way to gain access to that.

Kate Stalter: Now, those latter two that you just mentioned, that does sound like something that perhaps you would have to track on a regular basis as economic conditions change, as interest rates change and so forth.

Wade Hansen: You might want to pay a little closer attention to that if you are a longer term buy-and-hold person, as it could be just a portion of your portfolio as a hedge in the portfolio.

If you were to, say, begin moving back into equities right now, and thinking that now is a great time after the pullback in August to get into some equity positions and hold onto those, but you want to be prepared just in case things do turn around and people start to panic, you could invest in one of the dollar ETFs and have a little bit of protection there. We have seen the value of the US dollar and equities moving opposite each other recently.

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