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Using ETFs to Hedge a Stock Portfolio

ETFs, or exchange traded funds, can be great investment vehicles in their own right, butthey can also be used to hedge a stock ortfolio! "hen you hedge your ortfolio youattemt to reduce the risk of losing money in the event that the market, or a articular

sector of the market, suffers a correction! #ertain ETFs are erfect for adding a layer ofrotection against a market decline!

ETFs are baskets of stocks that track either a stock market index or a articular sector ofthe stock market! For examle the Siders S$P %&& ETF 'ticker symbol SP() tracks theStandard and Poor*s %&& +ndex! +f the S$P %&& increases by - then the ETF willincrease by about -! +nvestors can trade ETFs throughout the day .ust like they tradeindividual stocks! / benefit of ETFs is that they have very low trading costs and fees,esecially comared to mutual funds!

"hile most ETFs try to match the return of the index they track others try to do the exactoosite! These are called inverse ETFs! /n examle of an inverse ETF is the ProSharesShort S$P %&& 'ticker SH)! +f the S$P %&& increases by 0- then this ETF will decreaseby about 0-!

+nvestors can use the inverse ETFs to hedge a ortfolio of stocks! /s an examle, assumethat an investor has a ortfolio of stocks worth 1%&,&&&! He believes that the market isdue for a downturn but he does not want to sell any of his stocks! He can buy theProShares Short S$P %&& ETF to rotect his current holdings! +f the market corrects thenthe value of the ETF will increase! This will offset the decline in the value of his stocks!

There are also inverse ETFs that target secific sectors of the stock market! For instance,the ProShares Short Financial Services ETF 'ticker SEF) aims to rovide the inverse

return of the 2ow 3ones U!S! Financial +ndex! +f an investor feels that the financialservices stocks will decline and she wants to hedge the financial services stocks in herortfolio she can buy this ProShares ETF!

4everaged ETFs are available to investors looking to hedge their ortfolios whilereducing the amount of caital re5uired! +nverse leveraged ETFs try to double, orsometimes trile, the return of the index they track! The 2irexion 4arge #a 6ear ETF'ticker 678) aims to move in the oosite direction of the 9ussell &&& +ndex by a factorof three! +f the 9ussell &&& +ndex decreases by - then this 2irexion ETF will increaseby :-!

Using leveraged ETFs reduces the amount of caital re5uired to hedge a stock ortfolio!For examle, if an investor wants to hedge a 1:&,&&& ortfolio with the 2irexion 4arge#a 6ear ETF he will only need to urchase 1&,&&& worth of the ETF to fully rotect hisstock ortfolio! Since leveraged ETFs have the otential for large rice changes their useshould be closely monitored!

+f you are looking for an easy and cost effective way to rotect your stock ortfolio from amarket correct you should consider using inverse ETFs! They rovide a erfect way to

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hedge your ortfolio and have low fees! 6est of all, there are do;ens of inverse ETFsavailable to meet almost any hedging need!