| Use the U.K. to Make Money in the U.S. with the SPY and the LDN |
Same Financial Crisis...Different Impacts Every economy around the globe has been affected in one way or another by the global financial crisis. The difference is some economies have been more adversely affected than others. This is certainly true when you compare what has happened in the United States compared to what has happened in the United Kingdom. If you look at the value of the British pound (GBP) compared to the U.S. dollar (USD) and the health of the British financial industry compared to the U.S. financial industry, it would appear that the U.K. is getting the shorter end of the stick.  As an investor, you can take advantage of this imbalance using a Pairs Trading Strategy. When you use a pairs trading strategy, you find two investments that are relatively similar, and you buy the investment you believe is stronger and you sell the investment you believe is weaker. In this case, the U.S. is showing itself to be fundamentally stronger than the U.K.---which means the stocks in the U.S. should perform better than the stocks in the U.K. To put this imbalance to work in your account, you could buy an exchange-traded fund (ETF) that covers a broad range of stocks in the U.S.---like the SPDR Trust Series 1 (AMEX: SPY), which follows the performance of the S&P 500---and simultaneously sell an ETF the covers a broad range of stocks in the U.K.---like the NETS FTSE 100 Index Fund UK (NYSE: LDN), which follows the performance of the publicly traded securities in the aggregate in the British market, as represented by the FTSE 100 Index. Pairs Trade Results When you use a pairs trading strategy, you are able to hedge some of your risk, but you also give up some potential gains in the process. That is the cost of reducing your risk. Ideally, if you were to buy the SPY and sell the LDN, stock prices would increase, and you would make more money on the SPY trade than you would lose on the LDN trade---giving you a net profit on the pairs trade. Of course, if stocks went down in general, you would hopefully make more money on the LDN trade than you would lose on the SPY trade. Check out the video above for more details.
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3.25 Copyright (C) 2007 Alain Georgette / Copyright (C) 2006 Frantisek Hliva. All rights reserved." |
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