CHAPTER 20
Special Portfolio Strategies
The evolution of exchange-traded funds (ETFs) offers an increasing number of investment opportunities. ETFs are versatile. They can be optioned, shorted, hedged, and bundled into other securities. Those features have led to an array of strategies that were not easily achieved or feasible with traditional open-end mutual funds. There are four special uses discussed in this chapter. Those uses are:
1. Hedging strategies to reduce risk in a portfolio that is over-exposured to an industry. The technique is useful for people who work in an industry and are paid with restricted securities or company stock options.
2. Speculation using pairs trading by purchasing one ETF you think will increase in value and selling the same amount of another you think will decrease in value, or not increase as much. The result is a small gain earned from the performance difference.
3. Currency trading using ETFs and exchange-traded notes (ETNs) is a growing area of interest. Strategies can hedge the currency risk for global travelers as well as businesses that are buying and selling abroad. Currency speculators may also find ETFs and ETNs easier to trade and more economical than buying currencies directly.
4. Tax swapping is a simple and effective way to increase the after-tax performance of a taxable portfolio. If an ETF in your portfolio is at a loss, there is likely a similar fund that you can swap. The sell and buy creates a tax loss. Harvested losses can ...
