Lower-Cost Alternatives to Margin (Part 3)

02/12/2009 1:47 pm EST


John Jagerson

Co-Founder and Contributor, LearningMarkets.com

Leveraged ETFs are a good alternative to using margin to increase your buying power, but what if a bear market is in play and you don't really want to increase your buying power? Traditionally, investors would start scouting for short positions to take advantage of the downside potential in the market, but that comes with the disadvantages of margin again. A leveraged ETF may be a great solution in this situation.

Shorting stock means that you borrow the stock from your broker and sell it for today's price hoping to buy it back later and pay your broker back when the stock is at a much lower price. Selling high and buying low like this is one way to leverage a bear market. Typically, your broker will require you to leave half of the value of the stock you have shorted in your account in cash. They then "loan" you the remaining amount required for the stock that was shorted.

Shorting stock is a little complicated, and the charges on the loan made by your broker increase your trading costs. As an alternative, there are leveraged ETFs that take care of the shorting for you. For example, in the video below, we’ll talk about the difference between the QQQQ, which is a traditional ETF that follows the Nasdaq 100 index, and QID, a leveraged, "short" ETF that replicates the returns of using margin to short the QQQQ.

Because QID is the inverse of the QQQQ, it will rise in value as the bear market falls. This simplifies the process of taking advantage of a bear market and avoids the margin charges from your broker. Plus, short ETFs like this are not just limited to stock indexes. You can find them for industry sectors, commodities, and even currencies.

Click here for the video.

By John Jagerson, of PFXGlobal.com and LearningMarkets.com.

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