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Trading the S&P Is a Losing Strategy


Investors can better neutralize market risk with both long and short sector ETFs.

MINYANVILLE ORIGINAL Trying to guess where the S&P 500 (^GSPC) is going is a poor strategy, if it's even considered to be one at all. Very few traders or investors can trade the S&P 500 day in and day out, year to year, and make money. Yes, it's a good tell to understand the general trend of the broad market, and needs to be examined. But investing in the S&P will not generate absolute returns nor help you manage your risk. Individual investors should concentrate on outperformance.

At, one of the strategies we like to use is to neutralize market risk with both long and short sector ETFs. Ideally, we want individual stock exposure, but for those who want broad diversification, ETFs can work well. Below is a hypothetical portfolio and does not represent our current market view. This should only be viewed as a model portfolio and an argument for controlling portfolio risk. We use our proprietary sector signals to determine allocations to the appropriate sector ETF.

As you can see, we are long energy (XLE), technology (XLK), utilities (XLU) and retail (XTR) and short materials (XLB), and financials (XLF). You can see the weight of each allocation, and some of the stronger sector signals are weighted with larger allocations. More importantly, you can control your risk on a portfolio level by seeing your risk metrics and adjusting your allocations accordingly. The portfolio shown is 13% less volatile on an annualized basis than the S&P 500. On an annualized basis the S&P 500 has a standard deviation of 20.14% vs. our model's 6.3%. Additionally, the portfolio's beta is only .24, meaning if the market was down 1% on any given day, this model would only be down .24%. A market-neutral portfolio would have a beta of zero. You should take note that the expected return is half of the S&P 500 because you are taking significantly less risk. However, the expected return is pretty solid, considering this portfolio has one-third the volatility of the S&P 500. You can see that over the past 12 months this strategy was up over 27% vs. the S&P 500's 16.50% over the same time period.

Click to enlarge

Click to enlarge

Don't invest blindly. Know your risk.

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No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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