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BetaPro's Mr. Atkinson reports that the average length of time that an investor holds the firm's ETFs is about two weeks, or 10 trading days. But he says this is skewed by the fact that two-thirds of unitholders are institutional money managers, a group that is likely to be more active traders than retail investors. HBP estimates that individuals hold its products for an average of one or two months.
A speculative play with HBP bear ETFs might revolve around a belief that the energy sector is headed for a fall. One option would be to capitalize on a decline in the price of crude oil using the Nymex Crude Oil Bear Plus ETF. Or, maybe you believe that energy stocks will maintain a pattern of underperforming crude oil prices. In this case, you could buy the S&P/TSX Capped Energy Bear Plus ETF and benefit from declines in the S&P/TSX capped energy index, which includes the likes of EnCana, Suncor and Canadian Natural Resources.
Keep a close watch on your portfolio if you're speculating with leveraged ETFs. Remember, a bear market ETF would convert a one-day market rise of 2.5 per cent into a loss of 5 per cent. A few moves like that in a short period and you're cooked.
Hedging a portfolio with bear market ETFs is all about having something that goes up in a down market, even as most of your other equity holdings fall in value. Here's an example of how it might work from Mr. Atkinson that involves a portfolio where 70 per cent is invested in mainly Canadian stocks, 20 per cent is in bonds and 10 per cent in cash. To set up a hedge against a drop in the Canadian market, an investor could simply take the cash in the portfolio and buy the S&P/TSX 60 Bear Plus ETF.
"All of a sudden they're reduced their equities from 70 per cent down to 50 per cent," Mr. Atkinson said. "They have 20 per cent that will go up when the market goes down."
We've already seen how the share price of leveraged ETFs can wander off the "two times the underlying index" track. If you're holding bear ETFs as a hedge, this can disrupt your asset mix and give you more or less protection than you actually want. To remedy this, HBP offers a rebalancing tool on its website that tells you how much to buy or sell in order to get back to your target weighting (hbpetfs.com: look under Resources). Mr. Atkinson suggests rebalancing monthly if you're holding leveraged ETFs in volatile sectors such as energy and quarterly or semi-annually for calmer sectors.
Exchange-traded funds have grown hugely in popularity in the past several years because they're such a versatile way to build a portfolio. HBP's ETFs fit into this theme, but they're a much more specialized tool than most. Handle them carefully.
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Hunting bulls and bears
The Horizons BetaPro family of exchange-traded funds offer a bull and bear option for investing in 14 indexes and commodities. Each is designed to provide 200 per cent exposure to the market, which means the the impact of everyday market ups and downs is doubled. Here's a look at how a few popular HBP funds have performed lately.
Quick facts on HBP ETFs
Mission: Bull funds give you double the performance of a target index, while bear funds give you double inverse exposure.
Availability: As ETFs, these funds are listed on the Toronto Stock Exchange and trade like stocks.
Fees: The management expense ratio is higher than most Canadian ETFs at 1.15 per cent
Other costs: Brokerage commissions apply when buying or selling
Liquidity: Trading volumes for many of these funds are extremely high by ETF standards
RRSP eligibility: Yes
More information: hbpetfs.com
More choice: U.S. market leveraged bull and bear ETFs are offered by such companies as Rydex and ProShares.
THE GLOBE AND MAIL
SOURCE: GLOBEINVESTOR.COM