Daily Gains Letter

Here’s How You Can Profit from Any Type of Market

By for Daily Gains Letter | Feb 21, 2013

210213_DL_zulfiqarWhen it comes to investing for the long term, it is often said that you can’t control the wind, but you can certainly control the sail. In other words, the markets will have ups and downs; it all depends on how you navigate through them.

For those who are saving and investing for retirement, should you be discouraged by one downturn in the stock market? The answer is simply, “no.”

Thanks to financial technology and innovation in the investment products offered nowadays, investors can make money regardless of which direction the stock markets heads—upward, downward, or sideways.

Here are three examples of exchange-traded funds (ETFs) that investors can look at to take advantage of different market conditions and trends. (Note: This is not a specific buy recommendation; the following examples are meant for illustrative purposes only.)

Profiting from a Stock Market Trending Higher

Stock markets usually trend higher because the overall economy is performing well and the companies are showing better-than-expected corporate earnings—unemployment is low, income is okay, and consumers are spending.

If an investor believes the stock market will buck the trend, then they should look at an ETF like the Vanguard S&P 500 ETF (NYSEArca/VOO).

This ETF seeks to mimic the performance of the S&P 500 index. If the index increases, this ETF increases. The fund invests in companies that compose the S&P 500 index. In addition, it provides investors with exposure to different sectors. (Source: “Vanguard S&P 500 ETF Product Summary,” Vanguard web site, last accessed February 19, 2013.)

Through this ETF, investors not only take advantage of the soaring market; they also earn quarterly dividends.

Profiting from Panic in the Stock Market

Just as the stock market goes higher on good news, it heads lower when there is pessimism toward the economy and economic growth is questionable.

If you believe the stock market is going to turn and move downward, then look at an ETF like ProShares Short S&P500 (NYSEArca/SH) to profit from the downturn. This ETF essentially provides the inverse return of the S&P 500. For example, if the S&P 500 goes down by one percent, this ETF climbs by the same percentage. (Source: “Short S&P500 Overview,” ProShares web site, last accessed February 19, 2013.)

Instead of holding stocks in companies, this ETF holds futures contracts in the index. This way, the fund can profit the most when the stock market goes lower. Shorting shares of S&P 500 companies would mean that the fund would have to pay the dividends—a decline in value even when the market is going down.

Profiting from a Stock Market Trading in a Range

Sideways markets are the trickiest for investors. Not knowing the direction of the market’s next move can result in confusion. Sideways markets may occur when there isn’t a clear direction in the economy and investors are holding back on their bets—or for many other reasons.

If you believe the stock market is going to trade sideways, then you can take a look at an ETF like VelocityShares Daily Inverse VIX ST ETN (NYSEArca/XIV).

This ETF shorts the Chicago Board Options Exchange (CBOE) S&P 500 volatility index (VIX) futures—it’s important to note that it shorts futures, not the spot VIX. This means that if the futures of VIX go down by one percent, the value of this ETF rises in proportion. (Source: “XIV: VelocityShares Daily Inverse VIX Short-Term ETN,” registration statement, VelocityShares web site, last accessed February 20, 2013.)

When the market moves sideways, the VIX also moves sideways, but this ETF benefits from the “contango” effect (futures fall in value as the maturity price nears), which can help investors profit. In other words, as the stock markets trend sideways, so does the VIX, but its futures prices fall.

Keep in mind that when the market is trading in a certain direction, betting against it can hurt one’s portfolio significantly. Remember: the stock market rewards those who have the ability to change as the overall condition changes.

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