Two ETFs For the Summertime Blues

by: Gary Gordon June 06, 2007 | about stocks: BEP / DBV    
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When the markets move higher, the financial media tend to highlight stories that support a high allocation to stocks. When the markets are heading lower, however, they allude to the summertime's historical track record for underachievement.

In the current environment, the front-and-center fears include: (1) A stubborn Fed that will refuse to cut rates until it is too late, (2) A stock market that may be a bit too exuberant, and (3) A consumer who will eventually be forced to spend less due to weak real estate and/or increasing gas prices.

How rational are the fears? Well, the Fed does have a long history of arriving late to the show. That said, interest rates are historically low and there's no genuine threat of the Fed raising rates. And while real estate as well higher gas prices have been dragging on the economy, the idea that the havoc and devastation are around the bend is somewhat irrational.

Perhaps the one area where one can get a bit of a foothold in the door is the notion that stocks have acted a bit too exuberantly. Granted, the market remains fairly valued with regard to the all-important price-to-earnings ratio. Still, over the last 3 months, investors have discounted bad news and embraced good news. (Eventually, tides do turn.)

When it comes to sideways movement and/or slumping... even correcting... stocks sing a summertime blues tune. The inevitable question that follows? "Is there a cure?"

There's never a perfect cure for eliminating portfolio risk in a downtrend. Time-tested diversification is what many pundits prescribe, though the prescription is often ineffective. Why? Because they typically offer up bonds as the answer.

However, if the Fed doesn't reduce rates in 2007, stocks and bonds could suffer in tandem. This is why "true diversification" employs asset types with a low correlation or non-correlation to stocks. Here, then, are some of the better solutions for offsetting the "summertime blues."

1. PowerShares DB G10 Currency Harvest (DBV) This index is made up of long futures positions on three currencies with the highest interest rates and short futures positions on three currencies associated with the lowest interest rates. This has the effect of compiling an excess return from the differences between strong currencies like Australia and weak currencies like Japan. better yet, it has a historical risk (beta) that is 1/3 of the S&P 500. (What's more, it has gained 14% since September 2006!)

2. S&P 500 Covered Call Fund Inc. (BEP) BEP is a closed-end fund based on covered calls of the stocks in the S&P 500, yielding nearly 10%. For those unfamiliar with covered calls, it is a profitable and conservative way to cushion against significant downside risk. One is essentially forgoing the greater upside potential of stocks in a big run-up, gaining income at all times and gaining in appreciation at some of the down moments. (A peek at the graph below shows that, while the relationship is far from a scientific opposite, the approach has produced similar results to the S&P 500 with less risk.)


BEP, DBV, SPY 1-yr chart:

Disclosure Statement: As a Registered Investment Advisor, Pacific Park Financial, Inc. may hold positions in the ETFs, mutual funds and/or index funds mentioned above.

Gary Gordon

Gary Gordon

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