Fed taper talks and looming concerns over U.S. involvement in Syria managed to steal the headlines over the past few weeks as investors expressed their concerns over geopolitical tensions and upcoming monetary policy changes. The “herd” along with financial news media outlets are known for obsessing over “breaking news,” and as such, some might be rudely reminded over the coming weeks of a much larger, looming, unresolved economic issue; you guessed it, that pesky U.S. debt ceiling still hasn’t been “fixed” by Congress [see Visual Guide To Major Index returns by Year].
Less than one year ago, politicians on Capitol Hill were faced with steering the nation away from the much-feared “fiscal cliff” and policymakers successfully avoided a government shutdown by doing what they do best: kicking the can down the road. Call it deja vu if you like, but the fact of the matter is that Congress will once again be faced with our nation’s budget issues as the October 1st debt-ceiling approval deadline quickly approaches [see also 3 Market Valuation Indicators ETF Investors Must Know].
“Fiscal Cliff 2.0″ is coming, and while investors certainly shouldn’t panic over an issue that has loomed for years now, they might do well to look back at how Wall Street digested the Federal budget scare practically the same time one year ago. In fact, savvy traders may wish to take advantage of the upcoming drama in Washington D.C. seeing as how the stock market, as represented by the SPDR S&P 500 ETF (SPY, A), was quite active last year between 9/14 and 11/16; in that fairly short time frame, SPY sank upwards of 5%, creating a lucrative short-selling opportunity for some and an even better buying opportunity for others after the dust settled [see The Complete Visual History of SPY].
Below we highlight three ETF trades that turned in a solid positive performance last year between 9/14 and 11/16 while broad-based equity indexes took a nosedive. The ETFs profiled below may turn in another impressive performance this time around as budget talks heat up and political gridlock resurfaces; however, investors should keep in mind that history doesn’t always repeat itself word for word [see Picture Edition: Major Asset Class Returns From The 2009 Bottom].
As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit-taking techniques:
1. UBS ETRACS Fisher-Gartman Risk Off ETN (OFF, C+)
This one-of-a-kind ETN rallied over 7% in 2012 between September 14th and November 16th. Upon a closer review of the underlying benchmark, it becomes very apparent why OFF was able to capitalize during the pullback on Wall Street. OFF tracks an index made up of short positions in “risky” assets, including equities and commodities, as well as long positions in “safe havens” like Treasuries. Another fiscal cliff scare can easily prompt investors to ditch stocks and jump ship to bonds, in which case this ETN can serve as a great defensive tool to help smooth any dents to your portfolio over the short-term.
2. FactorShares 2x Gold Bull/S&P 500 Bear (FSG, C+)
FSG gained nearly 6% last year during the budget-induced correction on the home front. This ETF was able to capitalize on investors’ fear similarly to OFF, in that it benefited both from the stock market sell-off as well as the rally in safe havens, specifically gold. FSG works by tracking the spread, the difference in daily returns, between S&P 500 futures and the price of gold. This fund makes sense to use as a tactical tool for those who believe the precious yellow metal is bound to outperform the market if budget fears steal the headlines over the coming weeks [see 7 Rules ETF Day Traders Must Know].
3. QuantShares U.S. Market Neutral Anti-Beta Fund (BTAL, B)
BTAL rallied over 7% last year when markets turned south prior to their year-end rally. This ETF offers a unique approach when it comes to making a bearish bet without going “all-in” so to speak; BTAL includes a basket of long positions in the lowest beta stocks in the U.S. large cap equity market as well as short positions in the highest beta securities. As such, when uncertainty rises, investors are usually quick to scale back their risk in the equity market, often selling more cyclical stocks in favor of safer ones. In other words, when high-beta stocks do worse than their lower-beta counterparts, BTAL generates a positive return.
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Disclosure: No positions at time of writing.