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David Fry writes a subscription newsletter focused on technical analysis of exchange-traded funds, called ETF Digest (www.etfdigest.com). Dave founded the ETF Digest in 2001 and was among the very first to see the need for a publication that provided individual investors with information and... More
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ETF Digest
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Create Your Own ETF Hedge Fund, a DIY ETF Strategy for Private Wealth Management.
    Sep 13, 2011 3:23 PM | about stocks: GLD, IAU, SGOL, DGL, SLV, SIVR, PPLT, PALL, DBP, JJP

    Our goal in this profile is to help investors wade through the many competing ETF offerings available. Using our long experience as an ETF publication, and nearly 40 years in the investment business, we can help select those ETFs that matter and may or may not be repetitive. The result is a more manageable list of issues from which to view and make selections.

    With inflation pressures either rising or falling and with the dollar in decline it's important to have portfolio exposure to precious metals. Why? Because currency debasement and paper money in general have recently been disrespected making them an essential part of any portfolio. Easy monetary policies which began in 2008 have hurt the value of the dollar. Since most commodities are priced in dollars this puts upward pressure on prices which becomes inflationary. We've cobbled some good choices precious metals ETFs and ETNs where repetitive choices may exist but leave it to investors to pick the ones that suit them best. 

    As a former CTA (Commodity Trading Advisor) and CPO (Commodity Pool Operator) I know the value of having an allocation to direct energy ETF/ETNs. In fact I was involved with trading precious metals in the late 1970s when the previous spike in gold and silver took place. As meteoric as most precious metals markets have become it remains essential to have exposure if nothing else for insurance protection against poor global fiscal and monetary policies. Uniquely, most ETF/ETNs offer unleveraged exposure to these products as opposed to having to trade directly with futures contracts and leverage.

    We're not ranking these ETFs favoring one over another so don't let the listing order mislead you. Although we may use some of these in ETF Digest portfolios it's not our intention to recommend one over another.

    Whereas our previous technical analysis methodology involved using evaluating monthly charts commodity markets must be viewed with shorter time horizons. This is due to obvious increased volatility but also due to the peculiar nature with which underlying commodity contracts trade. Most futures contracts to which ETF/ETNs are linked expire quarterly. To be effective, direct commodity investing requires investors to be more active although investors in gold in particular view the asset now as a long term hold. Nevertheless, we're willing to trade them with the trend being out sometimes when it was more prudent to stay in with hindsight. We do this because we've seen large price changes over the years and remaining sanguine about this sometimes aren't an option. Therefore, it pays to be active and utilize a combination of weekly and daily technical charts to manage risk.

    Four risk factors should be considered:

    ·         The CFTC's varying considerations regarding commodity position limits as applied to the assets of ETF and ETNs--still in limbo.

    ·         Recently commodity exchanges have raised margin requirements to limit speculation.

    ·         The credit quality of ETNs given these are "notes" many guaranteed by Barclay's and Deutsche Bank.

    ·         Backwardation (back month contracts lower than front month) and Contango (back months higher than front month) can negatively affect contract rollover for investors.  

    ·         Since most commodities trade in dollars, the value of the dollar can positively or negatively affect price behavior.

    ·         Frankly, the rise in many precious metals, particularly gold, is much disliked by the powers that be since it's a negative vote by investors on their stewardship of fiscal and monetary conditions. As a result they may take actions to restrain price rises where and when they can.

    ProShares, Direxion Shares and Deutsche Bank features inverse and leveraged long/inverse ETNs for those investors wishing to hedge or speculate. The weekly charts that follow feature 22 period moving averages, Relative Strength indicator and conventional MACD moving averages. Not shown but perhaps referred to are Tom DeMark indicators which we use in conjunction with other proprietary indicators to determine our positions.

    ...READ MORE

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