A.I.M. Users Bulletin Board

[lrp42]

Hi Alton,

I have owned SDS, DXD, MZZ & TWM in the past. These were first purchased with the thought of AIMing them....a counterbalance to my long positions. However, after owning them for a short period of time it became clear to me that these inverse ETFs are good only as "short-term bets" against the market. I made some money with them last fall, but I think I was more lucky than skillful.

It seems to me that the best time to buy these is when the VIX (the Fear Index) has a reading down around 13 or even lower. That is when most investors are complacent and expecting a current bull market to go higher. Even then you could end up holding these ETFs for a long time before you see their intended effect. The VIX has a 19.73 reading this morning before today's markets open for trading. So now does not seem to be a good time to buy one of these inverse ETFs. Just my opinion. Here is a link to a VIX chart. Notice the low readings that occurred before we enter a significant market decline.

http://stockcharts.com/h-sc/ui?s=$VIX&p=D&yr=3&mn=0&dy=0&id=p63938085200

If you think about it, this strategy is not the same as long/short hedging. By that I mean you are not shorting any of your long positions and using the proceeds to add more to your long positions. There are several new mutual funds which follow a 120/20 or 130/30 strategy. For instance, Fidelity has recently introduced a new 130/30 mutual fund. Its symbol is FOTTX. There are a few others around now. They will short sale 20% or 30% of the stocks in their portfolio, which they believe will decline in price, and use those proceeds to add to their existing positions in those stocks which they believe will outperform in the future. However, unlike these long/short mutual funds, whenever you buy one of these inverse ETFs, you are doing so with money from your cash account and you are not adding anything to your long positions. With respect to an overall portfolio value, you are actually reducing the effect of any long gains and will continue to do so as long as your long positions gain in value.

If the long-term bias of the market was not upward, then this would be an excellent strategy to use. Unfortunately it doesn't work that way unless we go into a protracted, drawn out bear market as we did from 2000-2002.

Again, in my opinion, these are good "short-term" bets, but unsuitable for long-term AIMing purposes. Just speculative bets which you hope works out for you.

JMHO from someone who has owned these in the past.

Best regards,

Ray