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Long/Short ETFs to Fight This Stormy Market

A faltering Chinese economy and the resultant burst of Chinese stock bubbles on the one hand and dimmed chances of the Fed’s sooner-than-expected policy tightening on the other are leaving the global markets in a quandary. The contagion effect of the double whammy was strong enough to roil the otherwise decent momentum in the global markets.

Grave economic releases out of China and heightened volatility in its stock market caught the global markets off guard lately. Its exports fell 8.3% year over year in July widely falling short of analysts’ expectation of a 1.5% decline as well as a 2.8% drop-off recorded in June. This prompted the Chinese policy makers to devalue its currency yuan by 2% to maintain the export competitiveness on August 11.

However, the world did not welcome this action as several asset classes across the globe saw a bloodbath, confirming analysts’ fears of a currency war among export-centric Asian nations. Vietnam has already followed suit to counter the evil impact of the yuan devaluation (read: ETFs to Move on Yuan Devaluation).

If this was not enough, China’s manufacturing sector contracted to a six-and-a-half year low hit by low demand both within and outside China. While investors somehow started to digest the fears of a hard landing in China, things seemed unsteady even in the U.S.

The September timeline of the Fed lift-off now appears less likely as subdued inflation shifted the speculative timeline to December. Inflation is still short of the Fed’s longer-term target due to the free fall in energy prices last year and declining prices of non-energy related imports, per the Fed minute. Notably, U.S. consumer prices grew 0.1% in July, down from 0.3% and 0.4% recorded in the prior two months (read: Short-Term Respite for Gold ETFs?).

This is not the end. Japan, yet another global powerhouse, saw its economy shrinking 1.6% year over year in Q2 of 2015 compared to a solid 4.5% expansion in the first quarter. However, this is slightly better than the market expectation of a 1.8% decline. A drop in consumer spending, weak exports and lower private consumption were held responsible for this drop-off (read: 4 Small-Cap ETFs for a Bumpy Japan Ride).

From this global trend, we can easily say that the macroeconomic environment is anything but steady. Added to this, oil prices are stubbornly low, having slipped to a $40/barrel level lately on supply glut and global growth worries. The continued downward pressure on oil prices crushed plenty of oil-rich nations during this course.  For the top U.S. ETFs, investors saw SPDR S&P 500 ETF (SPY) lose about 3.7%, SPDR Dow Jones Industrial Average ETF (DIA) shed over 4.8% and PowerShares QQQ (QQQ) move lower by 6% in the last one month.

So, it would be wise for investors to rather settle on safe ETFs while playing the U.S. Safety and value should be the investment mantra in this stormy market. If caution is the keyword, investors can take a look at these two long/short ETFs which have beaten the aforementioned broader U.S. ETFs in the last one month.

U.S. Market Neutral Momentum Fund (MOM)
The fund looks to track the performance of the Dow Jones U.S. Thematic Market Neutral Momentum Index. The target index is equal weighted, dollar neutral and sector neutral. The index takes the highest momentum stocks into account as long positions and the lowest momentum stocks as short positions, in almost equal measure within each sector. Thanks to its focus on momentum stocks, this low volatile ETF offers a nice return even in a bull market.

The basket of about 200 stocks that the fund is long on seeks to outperform the portfolio of about 200 stocks with short positions. Despite its solid strategy, the product has so far been overlooked by investors with AUM of $1.3 million and average daily volume of nearly 1,500 shares. It charges a fee of 1.49% per year from investors and gained 9.9% in the last one month (as of August 20, 2015) and over 4.6% in the last five trading sessions.

U.S Market Neutral Anti-Beta Fund (BTAL)

Investors who want to shift their focus to investing in low beta stocks during this uncertain market environment can consider adding BTAL ETF to their portfolio. This fund tracks the Dow Jones U.S. Thematic Market Neutral Anti-Beta Total Return Index which is an equal weighted, dollar neutral, sector neutral benchmark. The index identifies the lowest beta stocks and goes long on them, while at the same time going short on the highest beta stocks (read: 3 Low Beta ETFs for a Choppy Market).
Like MOM, this fund also invests in equal dollar amounts for both the long and short positions, and looks to profit from the spread return between low and high beta stocks.  Like MOM, this is also thin on AUM having amassed just $2 million in assets. It trades in over 5,000 shares daily on average which results in a wide bid/ask spread and high trading costs. The fund charges 99 basis points as expenses and gained 4.6% in the last one month and 2.5% in the last five trading sessions.

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SPDR-SP 500 TR (SPY): ETF Research Reports
NASDAQ-100 SHRS (QQQ): ETF Research Reports
SPDR-DJ IND AVG (DIA): ETF Research Reports
QS-US MN MOMNTM (MOM): ETF Research Reports
QS-US MN AN-BET (BTAL): ETF Research Reports
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