5 ETFs to Profit from the Volatility

06/19/2012 11:30 am EST

Focus: ETFs

Doug Fabian

Editor, Successful ETF Investing, ETF Trader's Edge, Weekly ETF Report, and ETFU.com

As coalition building begins in Greece, and the Federal Reserve actions this week are yet  unknown, there is still plenty out there to spook the markets...so it's a good idea to have some good hedges in place, notes Doug Fabian of Successful Investing.

The big news last week was once again the fiscal machinations in Europe. Stocks got a sizable boost midweek when the market got word that central banks around the world were preparing a super-massive bailout if things got chaotic after this Sunday’s Greek elections.

The announcement of a £100 billion lending program to provide more liquidity into the system if a “Lehman”-like event takes place in Greece tells us that policymakers were preparing for the worst this weekend. [The results were not disastrous in this light, but neither were they solidly supportive—Editor.]

In light of all of this uncertainty, I am very glad we have most of our capital in cash and/or hedge positions, such as the Active Bear ETF (HDGE), ProShares Short MSCI EAFE Index (EFZ), PowerShares DB US Dollar Index Bullish (UUP), SPDR Gold Trust (GLD), and the Market Vectors Gold Miners ETF (GDX).

Despite the European uncertainty, the action last week in stocks was once again positive, as traders bet on a positive outcome in the continent, and on the prospect of more liquidity coming into the system. One thing traders love is monetary stimulus, and the hint of that caused the Dow to jump 1.70% on the week, while the S&P 500 gained 1.30%. The NASDAQ Composite edged just 0.50% higher.

Our HDGE, EFZ and UUP positions lost some ground on the week; however, both GLD and GDX gained ground. The result was effectively a wash in the portfolio for the week.

This week, the market will train its sights toward the Federal Reserve, which makes its decision on interest rates on Wednesday. The market is acting as if the Fed will conduct some form of stimulus, and if this happens, stocks will likely take off.

I suspect, however, that any rally on the news will be short-lived. That’s because some new form of stimulus will be confirmation that the US economy is very weak, and that we are going to struggle in terms of employment growth and jobs growth for the rest of the year.

The bottom line here is that no matter what happens in Greece this weekend, or with the Fed on Wednesday, the fundamentals of the global economy remain under significant duress. Until such conditions ameliorate, look for stocks of all stripes to continue feeling downward pressure even amidst the latest short-term price spikes.

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Related Reading:

A One-Stop Shop for Utiities

Using ETFs for Stability and Consistency

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