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Author: Sandhillguy Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 252185  
Subject: ETF Pairs Trading Date: 4/13/2009 2:02 PM
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I've long been intrigued by "pairs trading" (Google it), but was too nervous to put up real money ... until the arrival of ETFs which are much more predictable than stocks. The concept is simple: Find a pair of ETFs that are highly correlated but now priced at a ratio that's divergent from historical average. Buy one, short the other, and wait for equilibrium to return.

Right now I'm long GDX (gold mining companies) and short GLD. Although it's a short time frame, the ratio was rock solid at 0.6 from early 2006 through mid 2007, then dropped off, bottoming at 0.3 in late 2008.

I opened equal dollar positions when GDX/GLD was about 0.35. Goal is to close out at a ratio of at least 0.5 within 6-12 months. This would produce a tidy return of 40% with what seems to be very low risk. We shall see.

Anybody else doing or investigating ETF pair trading?

Extra credit: How about trading triplets?
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