Sunday, September 4, 2011

ETFs Analysis

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When it comes to the trading Exchange Traded Funds (ETFs) you have to understand that in most cases ETFs are derived products. They are usually designed / set to track performance of the indexes, groups of stocks or various commodities. As an example QQQ stock is developed to reflect the performance f the Nasdaq 100 index, the SPY stock is set to track the S&P 500 index, IWM tracks the Russell 2000 index, VXX tracks the VIX volatility index, GLD tracks the price of gold USO tracks the price of oil, an so on...

Because of the fact that ETFs are always tracking something they are often called as tracking stocks (they are called stock because these funds are traded exactly like stocks). Because of this tracking ability you have to understand the the price of an ETF is not always driven by the suply and demand in the ETF itself but rather by supply and demand in its benchmark index or benchmark commodity. Respectfully, it is always recommended to analyze benchmark index or commodity in junction with your ETF. So, if for example you trade SPY stock then it is essential to apply technical analysis to the S&P 500 index in the same way you do it with SPY. If you do not do it, then at some moment you may face a situation that despite all signal on SPY it moves in opposite to predicted simply because you did not know about opposite signals on the S&P 500 index.

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