Lower-Cost Alternatives to Margin (Part 2)
02/11/2009 11:38 am EST
In part one of this article series, we looked at leveraged ETFs as a way to avoid the disadvantages of using margin. Leveraged ETFs also provide most of the same benefits of traditional ETFs.
The most popular ETFs on the market today represent large pools of stocks and are usually modeled after popular stock indexes. For example, in the last video, I used the SPY and SSO, which are both modeled after the S&P 500 stock index, but one is leveraged and one is not. There are ETFs and leveraged ETFs that follow the Dow, Nasdaq, and Russell indexes as well.
The advantage of using an ETF or leveraged ETF that represents a pool of stock or an index is that it is self- diversified. Traders can reduce some of their market risk through diversification, which makes these ETFs very attractive. However, these ETFs are still focused on stocks only, and therefore, if the entire market is falling, the ETFs will fall also.
There are ways to increase the effectiveness of diversification by spreading your risk across other asset classes besides stocks. There are ETFs that represent the value and prices of assets like currencies, commodities, and bonds that can help improve your portfolio diversification.
For aggressive traders, it is possible to use leveraged ETFs to both diversify across asset classes as well as increase your buying power. In today's video, we will contrast two versions of non-stock gold ETFs in an unleveraged and leveraged version. These are new products, but are quickly giving more options to individual portfolio managers to manage risk and take advantage of opportunities.