by Lawrence Meyers | November 27, 2013 7:00 am
As we approach the end of the year, I found myself with some discretionary investing funds. I decided to try to an experiment, based on three factors that I believe will bias the market higher over the next 45 days or so.
So I purchased five aggressive ETFs with the intent to sell sometime in January, maybe as late as Jan. 31, and I suggest you do the same.
However — and this is a big “however” — I also set a 6% stop-loss on the entire basket. I want to make it clear that this stop loss is essential with this strategy. The volatile nature of these leveraged ETFs means there is a lot of risk, and stop-losses should always be used in these circumstances (and even when you buy other stocks).
But if you’re willing to be aggressive, take a closer look at these five trades to make before the year is out:
[3]Financials are in great shape with few headwinds right now, so if I’m feeling bullish, why not go as bullish as possible?
ProShares Ultra Financials (UYG[4]) aims to for returns that correspond to twice the daily performance of the Dow Jones U.S. FinancialsSM Index, which includes large financials such as Wells Fargo (WFC[5]) and JPMorgan (JPM[6]), as well as credit card stocks like Visa (V[7]) and American Express (AXP[8]).
The fund fee is a pricey 0.95%, but that’s because it leverages returns by using swaps traded through major multinational financials[9].
[10]Wilshire Micro-Cap ETF (WMCR[11]) was chosen because microcaps tend to be more volatile and have higher upside than safer blue chips. However, some of the risk is mitigated by having more than 1,100 securities; the diversification protects against massive moves.
Frankly, this is the least aggressive of the five, but that’s hardly an argument against it. WMCR is clocking the market at 40% gains year-to-date,
The fund is comparatively pricey at 0.58% in fees, and its largest holding, Cardiovascular Systems (CSII[12]) only accounts for 0.59% of the funds assets.
[13]Now onto the riskiest security of the lot.
ProShares UltraPro QQQ (TQQQ[14]) invests in the Nasdaq-100 Index — a collection of the Nasdaq’s 100 largest non-financial stocks — but uses swaps and derivatives to reflect a 3x movement in the index. Ergo, theoretically three times the returns, and three times the potential losses.
Apple (AAPL[15]) holds a 12.4% position as far as assets are concerns, with nine other well-known stocks taking up well more than a third of the assets. These include Amazon (AMZN[16]), Google (GOOG[17]), and Microsoft (MSFT[18]).
The expense ratio is 0.95%, so it isn’t a cheap play, but when big tech gets goin’, TQQQ gets goin’ through the roof.
[19]Of course, since my bullishness extends to the broader markets, too, I’ve bought into the ProShares UltraPro S&P 500 (UPRO[20]).
UPRO is just a straightforward play on the upward bias of the index, leveraged to three times the daily returns of the S&P 500 through the use of swaps purchased through many of the world’s biggest financial derivatives providers.
[21]To balance out this aggressiveness just a little, I also bought Guggenheim S&P 500 Pure Value (RPV[22]).
This was chosen to take advantage of the upward bias of the S&P in general, but with a focus on stocks that are undervalued. In theory, value stocks are already underpriced, so the downside risk is limited.
Genworth Financial (GNW[23]) is its top holding, and it costs 0.35% in fees.
I’ll compare the returns of these securities with the indices later in December.
As of this writing, Lawrence Meyers[24] was long UYG, TQQQ, UPRO, WMCR and RPV. He is president of PDL Broker, Inc.[25], which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books[26] and blogs about public policy, journalistic integrity, popular culture, and world affairs[27]. Contact him at pdlcapital66@gmail.com[28] and follow his tweets @ichabodscranium.
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