ETFs Analysis

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.

ETFs Trading

When it comes to the beginning of trading of the Exchange Traded Funds it is very important to ask yourself several important questions as

1. What is your investments goal (except more money..) - are you saving for retirements? are you planing to become a professional trader? or do you want just to keep money safe and secure them from inflation ...
2. What type of trader are you? - are you long-term trader who puts money in the market with the purpoce of extracting them in several decades? are you mid-term investor who follows the market and keeps an aye on the economy and time on time reinvest money around the stock market? or are you short-term trader who basicaly leaves with the market and spend most of the time by analysing and trading it?...
3. What funds are you ready dedicate for investment?
4. How mush from your portfolio are you ready to loose?
5. ...

The list could go on on. As you see, before begging to invest into the stock market, you have to ask yourself general questions. Many novice traders are coming to the market without previous planing and you will be surprised to know that many of them o not have answers on these simple questions. Eventually, without previous planing a trader is marked to lose twice more money and to spend twice more time before he or she actually starts to make something on the stock market.

I know, this is boring stuff to do research, yet, if you are going to put your money on the table you better get know what kind of table is it. Only when you know the answers on these general and simple questions you may start trading ETFs.

ETFs Trading

Exchange Traded Funds have become very popular over the past decade. This is one of the simplest way for many investors to trade the market. Amazing thing is that not just retail traders are using ETFs, but many professional investors, portfolio managers and big companies are investing into the ETFs.

One of the best thing about Exchange Traded Funds is that there is no need to perform fundamental analysis in order to start trading, especially when it comes to the trading funds that track indexes. You do not have to do it! Why? Because it is already done by the sponsors of the indexes. The index listing is revised on the regular basis and weak companies (stocks) are removed. As a result, a trader (investor) may solely focus on other aspects of trading such as technical analysis, developing a trading system, and etc.

So, do not waste you time in research of the magic stocks that can make you a fortune. Focus on something you are capable of doing. I do not believe that a simple trader has ability and access to precess thousands of information (reports, balance sheets) for thousands of stocks and do it on regular basis. trust the professionals who already do it for indexes and trade indexes through the Exchange Traded Funds (ETFs).

S&P 500 Chart

Another week is behind. The stock market is doing what it supposed to do (in the meaning of my technical analysis results). The main U.S. indexes (Nasdaq 100, S&P 500 and DJI) followed the pattern defined in the "S&P 500" post on May 14, 2009 and in the "S&P 500 Analysis Follow Up" post on May 18, 2009. In particular, the indexes moved up - back to the May 6-8, 2009 highs, but did not break those levels. Then the indexes have dropped down again.

Now, the same traditional question that bother all trader: "Up or Down?" The answer on this question could be different depending on the personal trading style. If you are long-term trader and expect to stay in position for years then you could be looking for the answer in long-term charts, in the analysis of the economy and fundamentals. On the other hand if you are short-term ETFs (Exchange Traded Funds) trader could be looking for the answer in the technical analysis of the short-term index charts.

I am not here to discuss long-term analysis of the U.S. stock market, and I am not here to say where the market is going to be on the next trading day after the market open. I usually do one post a week where I am trying to cover technical analysis of the 60-day (hourly, 1 bar = 1 hour) index charts. Depending on the market volatility these charts are covering 2-5 days trends, and even I do not trade these charts (I’m short-term trader) I use them to see the general sentiment of the indexes and accordingly adjust my trading strategy.

Coming back to the traditional chart setting you may see in my blog, I may say that the majority of the technical indicators on the S&P 500 index are Bearish. The similar tendency could be noted on the Dow Jones Industrial index. The Nasdaq 100 is not as bearish as S&P 500 and DJI, yet, still negative. I would not make a statement that the indexes are strongly bearish. There are some bullish indicators could be seen as well.


From the chart above you may see that there is some dominance of the bearish sentiment. It is not a strong dominance: the currently bearish indicators have been bullish on Friday May 23 almost whole trading session and has become bearish only by the end of the day (you may see RSI and Stochastics started to move down again). One of the main reasons why I would shift the odds in a favor of bearish move is because of the volume surge at high price on May 20, 2009 in S&P 500 and DJI sectors. We do not see such high volume on the Nasdaq 100 index, however, we have not seen a high volume on the Nasdaq 100 during the price decline on May 13, 2009 neither.

Even my technical analysis is somewhat bearish at this moment, I would still keep my eye closely on charts since the indexes are close to the May 13, 15 and 21 lows (see lower blue line on the S&P 500 chart above which mark shorter-term sensitive level) to see if this line is going to be broken.

Again, my technical analysis is subjective and reflects my personal view on the market. I may only recommend doing your own personal analysis which would fit your personal trading style.

ETFs Trading

ETFs (Exchange Traded Funds) was launched in 1993 with introduction of SPDRs (ticker: SPY) that tracks the S&P 500 index. Still SPDRs remains as one of the most traded stock (not just exchange traded funds) on the U.S. stock market. ETFs should always be look at as funds that could be traded as.

To see advantages of ETFs trading the one should compare them to mutual funds trading first and then to stock trading. By comparing ETFs to the mutual funds we may see that:

1. Intraday Trading: Mutual funds are always traded at the market close once a day and no matter when you place order to buy/sell mutual fund your order will be filled at the same time (at market close) and at the same price as orders of all other investors. Exchange traded funds could be traded as stock and you can purchase or sell them during the market trading hours. The ETFs provide investors with intraday trading flexibility of stocks which allow benefiting from the intraday price movements;
2.  Ability to Sell Short: As a rule when you invest into mutual funds you buy them - you cannot sell them short to open a position. For this purpose you have to look for inverse or Bear funds. That means that you have switch between bull and bear funds or participate in trading only in Bull markets (as a rule only index funds has inverse funds). In case of ETF, as was mentioned above, you trade it as stock, furthermore, you may sell it short and participate in Bear markets as well without looking for additional trading vehicle. Because of that, ETFs provide investors with wider range of speculative trading strategies in comparison to mutual funds;
3.  Low Cost: Exchange traded funds are considered as cost efficient trading tools. Because of their low cost a lot of professional and retail investors chose them for investments.

By comparing ETFs to stocks we may see other three points:

1.  Diversification: When you purchase a single share of ETF you invest into all stocks from the basket of the index this ETF tracks. For instance, by buying one share of QQQQ at $40, you invest into all 100 companies listed in the Nasdaq 100 index. Try to imagine how much it would cost you to buy one share of each company from the Nasdaq 100 index in order to get similar diversification;
2.  More conservative than stocks: The ETF price cannot drop to zero, ETF cannot be broke and it cannot file a bankruptcy. If you see it then this is The End. Index listing is managed by professionals: weak companies are reviewed on a regular basis and when it is necessary are replaced by the stronger companies. In case of DJI the listing is managed by “Wall Street Journal”, in case of S&P 500 the listing is managed by Standards & Poors, Nasdaq 100 index is managed by Nasdaq OMX, etc. They basically do portfolio selection and all fundamental analysis instead of you;
3.  Easier to analyze: By having several stocks in your portfolio, it could become complicated to analyze them. You have to do some fundamental analysis for each stock, look at chart and do some technical analysis and in addition it is recommended to analyze indexes that cover your stock to see your industry and whole market general trend. It could be quite complicated and time consuming. The ETFs analysis is simpler and very often it could be narrowed to technical analysis of indexes only.

As you may see that ETFs have become very popular because they attract mutual fund investors by their low cost, tax efficiency, saved features of the mutual funds and obtained flexibility of stocks. At the same time ETFs attract stock investors by their ability to diversify portfolio, simplified analysis, protection from bankruptcy. I may say that it is easy to understand why ETFs has become the most popular trading vehicle among all type investors, including large institutional investors, small speculators and active traders. Exchange traded funds have become very liquid (you may sell and buy them very fast) which is another important advantage. Some of the most traded ETFs are: SPY (tracks the S&P 500 index), XLF (tracks the S&P Financials), QQQQ (tracks the Nasdaq 100 index), DIA (tracks the Dow index), IWM (tracks the Russell 2000 index), etc.