Four ETFs To Play Increased Economic Uncertainty (SPY, DIA, DF, GLD, SH, VIXY, VIXM)

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June 5, 2011 10:14pm NYSE:GLD NYSE:SH

Last week numerous indicators enhanced economic uncertainty in the US, sending the Dow Jones Industrial Average (NYSE:DIA) to its longest streak in nearly seven years and all 10 of the S&P 500


 (NYSE:SPY) Index groups down.

Enhanced economic uncertainty was primarily driven by three major forces.  The first was a decline in the Conference Board’s measure of consumer confidence.  For the month of May, the index dropped by nearly 7.9% from the month before reaching a six month low.  Furthermore, the Conference Board indicated that consumers remain overly pessimistic about the labor markets during the next six months. 

The second troublesome number came from the real estate sector.  A decline in the Case-Shiller home price index of 3.6 percent year over year indicates that the housing market has reached a second bottom.  The flood of foreclosures and bank-owned homes to the market has likely resulted in a supply shock pushing home prices down.

The third major driver in increased ambiguity in the country’s economic health came from a weaker than expected employment report, which pushed the nation’s unemployment rate to 9.1%.  According to the Labor Department, employers added a less-than-projected 54,000 jobs last month marking the slowest monthly growth in payroll in eight months.  Furthermore, some employers plan to continue to cut headcount such as U.S. milk producer Dean Foods Co. (NYSE:DF) and ketchup maker H.J. Heinz Co. 

Weaknesses in the labor market are likely to be the largest factor in increased uncertainty as that consumer spending comprises nearly 70 percent of US GDP and consumer spending will most likely decline as the labor market weakens.  At the end of the day, employment growth is the fuel of the US economy.

Some other notable weak US economic numbers include a drop in the Institute for Supply Management’s business barometer to its lowest level since November 2009 and a decline in durable goods orders by 3.6 percent from the previous month, marking its largest decline in six months and a cool off in the manufacturing industry.

In a nutshell, the overall confidence in the nation’s economic health remains wary as data suggests that the nation has lost its economic growth momentum and has many investors and consumers wary of the near term future.

Some ways to play this uncertainty include:

  • SPDR Gold Shares (NYSE:GLD), gold has historically been a safe haven asset in times of uncertainty and will likely continue to do so
  • ProShares Short S&P 500 (NYSE:SH), which is an inverse ETF that seeks to move in the opposite direction of the S&P 500. 
  • ProShares VIX Short-Term Futures (NYSE:VIXY), which seeks to replicate the performance of the S&P 500 VIX with a weighted average term of one month.  The VIX is a well-known measure of the expected short-term volatility of the S&P 500 Index and tends to increase when anxiety in the US economy rises.
  • ProShares VIX Mid-Term Futures (NYSE:VIXM), which seeks to replicate the performance of the S&P 500 VIX with a weighted average term of 5 months.

Written By Kevin Grewal From ETF Tutor  Disclosure: No Positions 

Kevin Grewal is the founder, editor and publisher of ETF Tutor and serves as the editor at www.SmartStops.net, where he focuses on mitigating risk and implementing exit strategies to preserve equity. Additionally, he is the editor at The ETF Institute, which is the only independent organization providing financial professionals with certification, education, and training pertaining to exchange-traded funds (ETFs). Prior to this, Grewal was a quantitative analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds, arbitrage mechanisms and alternative investments. He is an expert at dealing with ETFs and holds a bachelor’s degree from the University of California along with a MBA from the California State University, Fullerton. He is a contributing author on The Street – his articles can also be found published on various sites including Yahoo! Finance, The Globe and Mail , Daily Markets, MSN Money, Seeking Alpha, Fidelity Investments, Traders Library, and Minyanville.


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