ETF Shuffles in My Portfolio

For readers who are tracking my 10 Clean Energy Stocks for 2009 portfolio, take note that I now think that SDS is a lousy hedge. So in the model portfolio I'm personally tracking, I replaced each dollar of SDS with $3 of cash and $2 short SPY, an ETF which tracks the S&P 500.

Because I'm tracking the portfolio as a way to see how well a reader would perform, I did the replacement at the closing prices on Feb 11th, the day the article where I explained why not to use doubleshort ETFs (and short, ultras, or triples, for that matter.)

Here's how the portfolio stood as of the close on February 12th:

Company	Ticker	Change since 12/27/08	Dividend & Interest
The Algonquin Power Income Trust	AGQNF.PK	+16.73%	0.87%
Cree, Inc.	CREE	+42.83%
First Trust Global Wind Energy ETF	FAN	-6.42%
General Electric	GE	-26.86%
Johnson Controls	JCI	-20.90%
New Flyer Industries	NFYIF.PK	+2.14%	0.77%
Ormat	ORA	+9.80%
Trinity Industries	TRN	-23.87%
Warterfurnace Renewable Energy	WFIFF.PK	+30.98%
-2x S&P Depository Receipts + 3x Cash	3x $ - 2x SPY	+2.92%
Net Change		+2.91%

For comparison, the iShares S&P Global Clean Energy Index (ICLN) is down 5.6% and the S&P 500 is down 4.3% over the same period. The reason that the 2x short + cash position is only up 2.92% instead of 8.6% is because of the underperformance of SDS.

(Here's the brief version: Suppose the underlying index starts at $10, drops $1 (10% of $10), and then to goes up $1 (11.11% of $9) for no net loss or gain. If you do the math, the corresponding short (x-1) or ultra (x2) ETFs will fall a net 2.2% over the same move, and the ultrashort (x-2) and the triple (x3) ETFs will fall a net 6.7%.)

Problems With Contango

The other reshuffle I did was in my real portfolio. A couple weeks ago, I wrote about why I bought OIL, a tracker for crude oil in the futures markets. A reader pointed out that this (and most other oil tracking ETFs) suffer when the futures market is in contango (i.e. the futures prices are higher than the spot price, as they are now.) Although oil futures market contango is a strong sign that price will rise, I decided that expected gains weren't enough to tempt me to stay in the market, so I sold my position.

Now that crude has dropped further, I'm considering a replacement position in USL, which tracks a basket of futures contracts over the next 12 months, rather than just the closest futures contract tracked by OIL (the same reader brought this one to my attention.) United States 12 Month Oil Fund (USL) is likely to lose less money than OIL when the market is in contango, because the futures market flattens out as you go out further into the future. But I'm still on the fence with this one.

DISCLOSURE: Tom Konrad owns AGQNF, CREE, FAN, GE, JCI, NFYIF, ORA, TRN, and WFIFF.

Comments

[ROLEXDAYTONA:]

Better show how this portfolio looks from January 2008, one month doesn't make it a good portfolio, 1 year does.

Feb 20 06:11 AM

[Bidd:]

Tom,
Do you still like CPTC? Could get big bump from stimulus and looking for partner on the wind side,

Feb 20 07:17 AM

[Bruce Pile:]

SDS and the other double shorts on the stock market are a weird and useless family of products. They are supposed to accurately track for just a one day period, I've read, and they can do any unpredictable thing over any other investment time period, severely distorting any tracking of an index, usually to the shorter's disadvantage.

Shorting the stock market may be better done nowadays with an array of quality gold stocks. The period where gold was moving in synch with stocks last year appears to be over and it has returned to its more typical behavior of being an inverse investment to stocks. Thus far this year, the GDX gold miners index is up about 12%, about the same amount that the Dow is down year-to-date. And picking the quality gold stocks like HMY (up about 25% on the year) outperforms the flawed, undependable products like SDS.

Feb 20 09:53 AM

[Mad Hedge F...:]

The longer crude stays below $40, the more production is being taken off the market. At this stage all 35 million barrels of storage at the Cushing, Oklahoma delivery point for west Texas intermediate are brimming with crude. The 709 million barrel Strategic Petroleum Reserve (SPR) is nearly full. And there is another 50 million barrels stored in supertankers at sea which is building by the day. Demand has collapsed so fast, that oil companies can’t shut down production fast enough. The scary thing about this is that when the next crude spike upward in crude comes, it will be worse than the last one. Take advantage of the current distress prices to accumulate oil infrastructure stocks. Kinder Morgan Energy Partners (KMP) has a PE multiple of 25 and a dividend yield of 8.3%. Enterprise Products Partners (EPD) has a $10 billion portfolio of fractionation facilities, storage, offshore drilling platforms, and 32,478 miles of product, natural gas, and crude pipelines, and carries a modest PE multiple of 12 X and a dividend yield of 9.2%. More expensive Kinder Morgan Energy Partners (KMP) with a PE multiple of 25 X and a dividend yield of 8.3% is also worth a look see.

Feb 20 10:55 AM

[Tom Konrad:]

I sold my CPTC. There's a lot more smart grid than transmission in the stimulus.


On Feb 20 07:17 AM Bidd wrote:

> Tom,
> Do you still like CPTC? Could get big bump from stimulus and looking
> for partner on the wind side,

Feb 20 08:39 PM

[Tom Konrad:]

I agree. I only revisited this portfolio so soon b/c I was changing the constituents.


On Feb 20 06:11 AM ROLEXDAYTONA wrote:

> Better show how this portfolio looks from January 2008, one month
> doesn't make it a good portfolio, 1 year does.

Feb 20 08:40 PM

[Mad Hedge F...:]

The longer crude stays below $40, the more production is being taken off the market. At this stage all 35 million barrels of storage at the Cushing, Oklahoma delivery point for west Texas intermediate are brimming with crude. The 709 million barrel Strategic Petroleum Reserve (SPR) is nearly full. And there is another 50 million barrels stored in supertankers at sea which is building by the day. Demand has collapsed so fast, that oil companies can’t shut down production fast enough. The scary thing about this is that when the next crude spike upward in crude comes, it will be worse than the last one. Take advantage of the current distress prices to accumulate oil infrastructure stocks. Kinder Morgan Energy Partners (KMP) has a PE multiple of 25 and a dividend yield of 8.3%. Enterprise Products Partners (EPD) has a $10 billion portfolio of fractionation facilities, storage, offshore drilling platforms, and 32,478 miles of product, natural gas, and crude pipelines, and carries a modest PE multiple of 12 X and a dividend yield of 9.2%. More expensive Kinder Morgan Energy Partners (KMP) with a PE multiple of 25 X and a dividend yield of 8.3% is also worth a look see.

Feb 22 11:21 AM

[squark62:]

BrucePile: i don't find SDS a useless product. used in combination with it's ultralong twin, SSO, they have provided me very "measured" protection to the downside. the beauty of hedging is in the eye of the beholder. one hedge doesn't fit all.

On Feb 20 09:53 AM BrucePile wrote:

> SDS and the other double shorts on the stock market are a weird and
> useless family of products. They are supposed to accurately track
> for just a one day period, I've read, and they can do any unpredictable
> thing over any other investment time period, severely distorting
> any tracking of an index, usually to the shorter's disadvantage.

Feb 23 12:18 PM