Yesterday my market risk indicator moved back to positive territory. It’s looking like price above 1975 on the S&P 500 Index (SPX) is roughly the level where the risk indicator clears so you can use that level for planning during the week. If the readings can hold into Friday it will clear the current market risk warning. If that happens it will result in the Volatility Hedged portfolio going 100% long (for official tracking purposes I use SPX for the longs). The Core Long/Short Hedged portfolio will remove the aggressive hedge (mid term volatility) and replace it with a short of SPX (or using SH). The longs for the core portfolio are stocks that should outperform the market during an uptrend (high beta stocks). As I mentioned above I use SPX for tracking the Volatility Hedged portfolio, but I personally use high beta stocks with that strategy.

Recently I’ve been asked if an ETF can be used for the long portion of the core portfolio rather than stocks. The answer is yes, if you use a high beta ETF. The core portfolio often hedges with a short of SPX so it would be counter productive to be long an ETF that performs like the general market…the portfolio might as well be in cash. What you want is a long portfolio (or ETF) that out performs SPX in up trends and likely falls faster in down trends.

I don’t recommend longs because I believe you should do your own due diligence before buying any investment product. However, I’ll be glad to tell you how I’d go about finding an ETF for the long portion of the portfolio. I’d start by looking at “style” or “managed” ETFs that have a high beta over long time frames. Here are three I found pretty quickly. PowerShares S&P 500 High Beta Portfolio (SPHB), Global X GuruTM Index ETF (GURU), Guggenheim S&P 500® Pure Value ETF (RPV). You can start with any ETF you like, then check its beta.

You can check the beta of an ETF using Yahoo’s risk profile. Here’s an example for RPV. It has a 3 year beta of 1.15 and a 5 year beta of 1.24. I like to see the beta above 1.15. The reason for this is that during a down trend when the portfolio is hedged I like to see the longs falling to discounted levels. This allows me to take profit on the hedge and use that money to buy more of the stocks (or ETF) that I want to own over the long term. For example, if the hedge is up 10% or 15% and the long ETF is down 20% I’m buying at a good discount with money I made from hedging.