Over the years, exchange-traded funds have become popular with investors and traders alike. Whether these products are used for building long-term, buy-and hold portfolios, to establish tactical tilts, or for intraday trading, Wall Street continues to find new ways to utilize ETFs. In this piece, however, we’re stepping outside the box, highlighting three “unconventional” uses of ETFs.
MINT as an Alternative to Your Savings Account
With interest rates at all time lows, traditional savings accounts are now only yielding about 0.01% at most of the major U.S. banks. Investors can of course park their money in high yield savings accounts, but another alternative is to invest on ultra-short term fixed income ETF.
PIMCO’s actively managed Enhanced Short Maturity Strategy Fund (MINT ), for example, is an excellent way for investors to preserve capital. The fund strives to deliver greater income and total return potential than money market funds, but is still a very low risk investment.
MINT’s portfolio consists mainly of investment grade short-term debt, as well as mortgage- and government-related securities. The fund has an effective maturity of only 0.36 years, and the majority of the holdings are almost all rated above A. MINT’s distribution yield is about 0.63% (as of 4/21/2015).
Currency and Oil ETFs to Hedge Against Your Vacation Costs
If you are worried about the amount of money you will be spending on gas during your vacation, or fear the cost of gasoline will rise during your getaway, oil and energy ETFs could be used to hedge against these costs. Equity funds like the Energy Select Sector SPDR ETF (XLE ) or the futures-based United States Oil Fund (USO ) are both great options for this type of hedge.
For example, let’s say you went on a week-long vacation from April 14 to April 21 in 2014. During this time, the average cost of gasoline in the U.S. jumped from $3.67 to $3.725 per gallon. If you would have bought a single share of XLE on the first day of your vacation, at $89.66, by the end of your get away, the fund was trading at $93.42.
The jump in XLE could have certainly covered the costs of the increased gas prices during the trip.
If you’re travelling abroad, you may also want to consider using currency ETFs to hedge against the cost associated with exchange rate risk. For example, let’s say you plan on taking a vacation to Europe in a few months, and you believe that in a few months the euro will appreciate relative to the U.S. dollar. To make a play on this scenario, you could purchase the CurrencyShares Euro Currency Trust (FXE ); the fund will increase in value when the euro strengthens.
As a Way to do Insider Trading
A few years ago, the Securities and Exchange Commission began looking at how ETFs have emerged as a possible mechanism for maximizing gains in one stock while potentially masking trading patterns [see How to Lose Money Trading ETFs].
A technique known as “stripping” involves purchasing an ETF that includes an allocation to a stock about which a trader has insider information, and then selling short all the other components of that fund.
Say for example, a trader receives insider information about Apple (AAPL) stock, and that trader believes that once the rest of the market hears this information, the stock will rally. Instead of outrightly buying Apple shares—which would certainly raise a red flag—the trader could buy the Technology Select Sector SPDR ETF (XLK ), which allocates over 17% to AAPL. The trader would then place short positions on the remaining 73 companies in XLK’s portfolio.
Considering that insider trading is illegal, we here at ETFdb.com do not recommend using ETFs for this purpose.
The Bottom Line
While these unconventional ETF strategies may not be practical for most investors, they do show how these innovative securities could be used in many different ways. From building blocks, to powerful trading tools, to the more out-of-the-box plays, there’s sure to be an ETF for every objective.