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MITTS Investing

Anyone who has been investing, whether it is through a retirement account or brokerage, doesn't need to be reminded that even “safe” stocks can and will suffer when the economy goes through rough times.

Every downturn in the economy further stresses our ability to manage risk. In an era when political brinkmanship can tank an otherwise stable economy, investors can easily become paralyzed and discouraged as they search for a safe way to protect their money and have potential for profit.

In reality, the answer to this problem is right under everyone's noses. These special investment types are traded on the NYSE and AMEX, are completely immune to downturns, and have very strong profit potential.

They are called Market Index Target Term Securities (MITTS), and, to a large extent, they are the perfect investments for bearish markets since they offer the prospect of all gain and no pain.

Market Index Target Term Securities: a Better Way to Battle the Bear

Here's how they work...

Although they are traded just like stocks, these equity-linked notes function in a similar manner as loans or bonds. However, in this case, there is no potential for default and there are no fixed interest rates.

Instead, the payout when the MITTS mature is entirely linked to the performance of a specific index or group of stocks.

When these notes mature, the financial institution that issued the MITTS repays the original investment plus an amount based on the appreciation of the underlying stock index.

If the index behind the MITTS turns down and goes below the initial level when the MITTS were created, you get the entire principal, or amount you invested, back without any loss.

Here is a quick example...

Let's say you want to invest in something tied directly to the S&P 500 index at the beginning of 2008. You could use the SPDR S&P 500 ETF Trust (NYSEARCA: SPY) or a MITTS offered by a major bank or financial institution.

If you chose the ETF, you would have seen up to a 40% loss over the course of the year.

If you chose the MITTS, you'd have no gain, but you would have all of the money you invested back once the MITTS matured at the beginning of 2009.

Now, let's look at 2009. SPY and the MITTS would both see a gain of 26% over the year.

Over the two-year period from the beginning of 2008 through the end of 2009, the investor using SPY would have incurred an average 14% loss over two years. The investor using the two one-year MITTS tied to the S&P 500 index would have posted an average 13% gain over two years.

But the gains go higher.

In 2013, you could have cashed out for 62% with an HSBC sponsored MITTS investment tied to the DOW Jones Industrial Average.

A serious issue with our MITTS explanation so far should be apparent. You only get the principal for the MITTS when they mature. You cannot (generally) cash out early.

However, you must consider a fact from above: MITTS are traded like stocks.

MITTS Are More Flexible Than You'd Think

Some people inevitably are willing to take a loss to move money out of a position. Whether they need the money to cover losses elsewhere or believe they have more profit potential elsewhere, sometimes MITTS are traded below their intrinsic value.

This variability in the MITTS “stock value” gives investors the chance to lock in a guaranteed gain if they are willing to hold them until maturity. They may also sell their position once the underlying index rebounds and rises.

That makes a MITTS an interesting, no-risk way to be bullish on the underlying index.

Bank of America issued a S&P 500 MITTS due on February 28, 2014 listed under MGJ on the NYSE. When it was issued, it cost $10.00 per unit and Bank of America guaranteed a 100% return of the principal investment.

If the S&P 500 tanks before the expiration date, MGJ could come down and go below the $10 per unit guaranteed return. While this isn't common, a MITTS did just that in May of 2009. Ten dollars was guaranteed and it dipped to $9.80 per share.

This situation provided an opportunity for investors to use the MITTS to guarantee a 2% return when it matured. Any returns from the subsequent recovery and rally of the S&P 500 would add to the return.

Peace of Mind in Long-Term Investing

MITTS may not be perfect for everyone due to the relatively long time it takes for them to mature. Virtually all are issued with a five-year term. However, with their no-risk approach to index investing, they can serve investors extremely well, especially when you don't know how uncertainty in the market will pan out.

If you ever find yourself wondering how to protect your retirement account or capital during a market downturn, don't forget to check out Market Index Target-Term Securities.

Wealth Daily will be keeping an eye on the markets and will continue to find overlooked and unconventional ways to confidently invest and capture gains, whether we're in a bearish or bullish market.


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