ETF Loss Hedging: Essential for SPY and Other ETF Buy and Hold Investors

Exchange Traded Funds like the broad-based SPDR Standard & Poor's 500 ETF (NYSE: SPY) offer excellent stock diversification. But as the last decade shows, even optimal diversification is not sufficient to produce long-term capital growth with the usual buy & hold strategies.

The SPY ETF lost in the 2000-2010 decade around 15%. 10 years of holding ETFs without buffering them against medium term market price corrections and bear market downtrends resulted in a loss.

The two large market retracements of the current year 2011 illustrate already how intermediate downtrends affect annual ETF portfolio performance and that this volatile market environment isn't over. It is evident, that any successful long-term ETF investment requires loss hedging. No hedging will be perfect, but any sophisticated hedging is better than none.

It is strange, that only very few investment advisors suggest ETF portfolio hedging against general market downtrends. Dollar averaging certainly isn't sufficient and to no avail for investors which are not adding regularly new funds to their portfolio.

It is clear, that protection of Mutual Funds against market losses by trend trading or by trend directed allocation swaps between Mutual Funds and Bonds is too expensive transaction cost wise and that Mutual Funds miss options to protected them during market corrections. But for Exchange Traded Funds the situation is quite different: ETFs are liquid, exchange traded securities, the buying and selling of which in discount broker accounts is inexpensive. And there exist very liquid options for most popular ETFs. This allows any private investor to change asset allocation at least during bear markets or to learn more sophisticated option strategies to insure ETFs in self-directed internet discount broker or even in IRA accounts. The latter really boosts performance, a thing especially baby boomers really need.

Using ETF puts or writing ETF calls are efficient (though, of course, never perfect) strategies to protect ETFs both against medium term market corrections and against bear market losses. More sophisticated hedging strategies offer even the opportunity to make some ETF investment profits during bear markets. All this will improve the long-term wealth growth considerably.

www.best-smart-investing.com offers a tutorial of the full practical know-how of 4 easy to learn and to manage strategies to hedge Exchange Traded Funds against medium term market pullbacks and during bear markets. Two of the strategies even focus on the potential to generate double ETF returns or capital gains even in bear markets by very small additional investments. The strategies don't require short-term trading and are not time-consuming. As most internet broker offer today test accounts, the test accounts can be used to test the strategies and to train its practical application.

The managing of ETF hedging strategies requires to be able to determine the begin and end of bull trends, bull trend corrections and bear down trends. The website www.winway-spy-signals.com publishes medium term trend signals for the Standard & Poor's 500 index. These medium term signals allow any investor to time the hedging of broad-based ETFs, of course especially of SPDR S&P 500 ETF (NYSE: SPY), without trend guessing, without depending on market trend news (noise) or on time-consuming medium term technical market trend analysis.

In 2010 the SPDR S&P 500 ETF was hit by medium term pullbacks of 6%, 13,7% and 6,2%, causing a total of intermediate losses of 26%. In 2008 the intermediate losses where 16,1%, 13,2% and 38,2%. Imagine how hedging ETFs according to the strategies referred to above would have boosted the portfolio return during these two loss years and how alone compensating the intermediate losses of two years would have changed the total return of the decade, not to speak of the difference bear market hedging would have made in a bear market like the one which started in 2000.

René Schmid

I am a financial professional (but no investment advisor) and now a senior investor with over 3 decades of investment experience. In the course of my investing I learned, that avoiding general market risk is even more important than good asset allocation. I studied and tested over many years strategies to best hedge ETF investments efficiently against market pullbacks and crashes.

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