Q:How can a retail investor put on a trade to short the Chinese yuan? Can an investor use an ETF and are there better ways? Michael Russotti, New York, and Dallas Bond, Healdsburg, Calif.
A:A number of hedge funds have placed wagers against the Chinese currency. The moves run against conventional wisdom. China has been among the fastest-growing nations, and most economists expect the expansion to continue. And China has kept its currency within a tight band. The contrarians counter that the Chinese economy is facing huge debts and is a bubble waiting to burst.
These investors are buying "put" contracts from a bank, which give them the right, but not the obligation, to sell yuan and buy an equal amount of U.S. dollars at a set price. Earlier this year, the cost of a one-year contract allowing the investor to sell $10 million of yuan at 20% below current levels over one year cost just $15,000. If the yuan tumbled 30% the contract would produce a profit of about 5,500%.
Most banks won't enter into these agreements with individual investors unless they're a major client with extensive experience trading currencies, partly because the trade is considered highly risky. Christopher Pavese, chief investment officer at Broyhill Asset Management, suggestsPowerShares DB US Dollar Index Bullish Fund, an ETF that in theory could do well if the yuan falls. Shorting WisdomTree Dreyfus Chinese Yuan, an ETF that wagers on the yuan, is another option.
Matthew Tuttle, president of Tuttle Wealth Management, suggests bets against Chinese companies for those very bearish on China. For those able to handle extreme volatility and possible losses, he recommends Direxion Daily China 3X Bear Shares. This ETF aims to deliver an inverse return of three times an index tracking Chinese American depository receipts. It has lost about 9% so far this year. He also suggests the ProShares UltraShort FTSE China 25, which aims for a return that's twice the inverse of the daily performance of the FTSE China 25 Index.
Mr. Tuttle says investors should wait until weakness begins in China before making bearish bets.
Q:How can an equity portfolio generate income without buying master limited partnerships, utilities and other traditional dividend stocks?
A:Stocks face strong headwinds amid a weak U.S. economy and worries about European debt. As such, more investors are buying shares of companies with generous dividends. But many of those stocks, such as master limited partnerships, already have climbed and may have higher risk.
Peter Amendolair, chief investment officer of Destra Capital Advisors, recommends preferred securities. These shares can be safer than equities. They have a higher claim on any assets of a company and often pay generous dividends. "Preferred securities currently represent the highest yielding investment grade asset class," he says. Destra is a fan of preferred shares ofConstellation Energy Inc.
Another fan of preferreds: Warren Buffett's Berkshire Hathaway, which recently made a $5 billion preferred-stock investment in Bank of America.
"Investors should think of preferreds as somewhere between a stock and a bond," says Mitch Schlesinger, chief investment officer of FBB Capital Partners. "They trade on an exchange the way stocks do, but the dividends are generally quite high, like those from long-maturity bonds," he says.
These dividends usually are paid quarterly, like common stock dividends. Mr. Schlesinger says investors should keep in mind that these shares are more volatile than bonds.
Many preferreds are issued by banks. Marilyn Cohen, president of Envision Capital in Los Angeles, notes that preferred shares of financial companies got burned in 2008, as did regular shares.
To reduce risk, you can invest in a diversified group of preferreds. There are also ETFs and mutual funds that hold these securities, such as iShares S&P U.S. Preferred Stock.
Another way to generate cash from a stock portfolio: Sell stock options. Options give an owner the right, though not the obligation, to buy shares at a specified price at some point in the future.
Paul Stewart, co-portfolio manager of the Gateway Fund, a mutual fund, says investors convinced the market will either fall or be flat for the foreseeable future could sell "call" options on the Standard & Poor's 500-stock index. These options are especially valuable in volatile markets. Currently an investor who sells a one-month call option to buy about $120,000 worth of shares in the S&P 500-stock index could pocket nearly $4,400 if the market remains flat or falls at the end of that month.
The downside: If the market rises 10%, the option would climb in value, and the investor who sold it will pay $12,000 at the option's expiration date. That means losing about $7,600 after pocketing the initial $4,800. But the value of one's stock portfolio also would have risen, easing the pain.
And keep in mind that call profits are taxed like capital gains—at a higher rate than dividends.