Using ETFs to Hedge a Stock Portfolio ETFs, or exchange traded funds, can be great investment vehicles in their own

right, but they can also be used to hedge a stock ortfolio! "hen you hedge your ortfolio you attem t 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 of rotection against a market decline! ETFs are baskets of stocks that track either a stock market index or a articular sector of the stock market! For exam le the S iders S$P %&& ETF 'ticker symbol SP() tracks the Standard and Poor*s %&& +ndex! +f the S$P %&& increases by ,- then the ETF will increase by about ,-! +nvestors can trade ETFs throughout the day .ust like they trade individual stocks! / benefit of ETFs is that they have very low trading costs and fees, es ecially com ared to mutual funds! "hile most ETFs try to match the return of the index they track others try to do the exact o osite! These are called inverse ETFs! /n exam le of an inverse ETF is the ProShares Short S$P %&& 'ticker SH)! +f the S$P %&& increases by 0- then this ETF will decrease by about 0-! +nvestors can use the inverse ETFs to hedge a ortfolio of stocks! /s an exam le, assume that an investor has a ortfolio of stocks worth 1%&,&&&! He believes that the market is due for a downturn but he does not want to sell any of his stocks! He can buy the ProShares Short S$P %&& ETF to rotect his current holdings! +f the market corrects then the value of the ETF will increase! This will offset the decline in the value of his stocks! There are also inverse ETFs that target s ecific 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 financial services stocks will decline and she wants to hedge the financial services stocks in her ortfolio she can buy this ProShares ETF! 4everaged ETFs are available to investors looking to hedge their ortfolios while reducing the amount of ca ital re5uired! +nverse leveraged ETFs try to double, or sometimes tri le, the return of the index they track! The 2irexion 4arge #a 6ear ETF 'ticker 678) aims to move in the o osite direction of the 9ussell ,&&& +ndex by a factor of three! +f the 9ussell ,&&& +ndex decreases by ,- then this 2irexion ETF will increase by :-! Using leveraged ETFs reduces the amount of ca ital re5uired to hedge a stock ortfolio! For exam le, 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 his stock ortfolio! Since leveraged ETFs have the otential for large rice changes their use should be closely monitored! +f you are looking for an easy and cost effective way to rotect your stock ortfolio from a market correct you should consider using inverse ETFs! They rovide a erfect way to

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