A Rare Index Speculation

By Travis Johnson, Stock Gumshoe, September 12, 2008

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I opened a small position in the Ultrashort Financials ETF from PowerShares (SKF).  This ETF returns 2X the negative return of the financial sector index, so it’s a leveraged bet that the financials will continue to fall.  This is really a speculation that the collapse in the financial stocks will continue, and that shoes will continue to drop — but in this way it’s also a hedge, since falling financials hurt many of my other holdings.  This way, if financials continue to drag the market lower I’ll at least have a small hedge against that in my portfolio.

I wouldn’t be surprised if this ETF actually performs fairly well even in the long term, since even after this crisis in the credit markets it’s going to probably be a few years before most of the big financial companies — especially the investment and money center banks — are able to return to significant profitability in their core businesses.   But this isn’t a “bet” that I have a lot of conviction about, so I’m keeping a tight stop of about 8% on this one in case I’m wrong.  This is a bet, not an investment. And in the short term, it’s about investor panic and greed — the net asset value of the ETF is actually down this morning, while the price is up, so I could easily get stopped out fairly quickly if something happens to stem the panic today or over the weekend.

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