Why actively trade ETFs?

Discussion in 'ETFs' started by deronwagner, Aug 22, 2002.

  1. Since I have converted from trading exclusively stocks to ETFs during the past six months, I wanted to share some insight as to why I like swing trading them because there are so many benefits!

    Reduced risk of obliteration! Do you ever wonder if you are going to wake up in the morning and have your stock be the next one to drop 50% that day because the CEO got caught with his hands in the cookie jar? The diversification factor greatly reduces this risk because there is minimal exposure to any one individual stock. For example, the biggest single exposure in the Semiconductor HOLDR stock (SMH) is Intel, which currently has a 21.18% weighting of the index. Reducing the odds of getting totally wiped out should always be your number one priority!

    No uptick rule. Unlike traditional securities, ETFs are not subject to the uptick rule that prevents the short sale of securities on a downtick. This makes selling an ETF short much easier and quicker than with a traditional stock.

    Lower trading commissions. Prior to ETFs, if you wanted to buy a basket of stocks within a particular sector, it could get expensive because you generated one commission for each stock you wanted to buy. With ETFs, there is only one commission to buy or sell short the whole sector.

    Access to more markets. With ETFs, you now have access to markets that were previously unavailable to equities traders, such as Government T-bonds and many International markets. With new ETFs being created every month, the realm of trading opportunities keeps growing.

    More follow-through. You have identified a particular sector you would like to be in, place the trade, then watch every single stock in the sector go in your direction EXCEPT the one you are in. Ever happened to you? With ETFs, you are at less risk of buying or selling short the wrong stock within a particular sector because you are essentially buying or selling short the entire sector! This means that it does not matter as much if Morgan Stanley has a big sell order in AMD because you will also have exposure to the rest of the stocks in the Semiconductor index if you buy SMH.

    Better trending. ETFs chart better than individual stocks because even if one stock within the index is volatile and erratic on a particular day, the composite of associated stocks within the ETF aids in smoothing out the trend.

    Fast executions. Although you can trade ETFs through a traditional stock exchange such as the NYSE or AMEX, you can also trade through ECNs such as Island, ARCA, or Redibook. This enables you to get instant executions, especially because the average daily volume in ETFs has been steadily increasing.

    I will share my discoveries and thoughts on trading ETFs in this thread as it grows.
  2. There are presently 257 ETFs trading worldwide, although American traders do not have access to all of them. The American Stock Exchange (Amex) is the pioneer of the ETF, responsible for bringing the first domestic product to market in 1993. Leading the industry in ETF listings, the Amex lists 121 ETFs to date.

    The three most popular and liquid ETFs are QQQ (the Nasdaq-100 index tracking stock), SPY (the S&P 500 index tracking stock), and DIA (the Dow Jones Industrial Average index tracking stock). QQQ is so liquid that it trades an average daily volume of about 107 million shares per day, making it ideal for short-term trading. SPY trades an average of 37 million shares per day, while DIA trades over 8 million shares per day. These three ETFs provide a multitude of trading opportunities on any given day, all with lower risk than individual stocks. In addition to these three ETFs, there are 118 more domestic ETFs, which I have grouped by family below:

    HOLDRS - This is an acronym that stands for HOLding Company Depositary ReceiptS (pronounced "holder"). These securities represent ownership in the common stock or American Depositary Receipts (ADRs) of specified companies in a particular industry, sector or group. Issued by Merrill Lynch, there are currently 17 different HOLDRS. Of these, there are 6 that trade an average daily volume of at least 300,000 shares per day (based on the monthly average daily volume of the past three months). With the exception of two of them, all the HOLDRS track specific market sectors or industries. The most popular HOLDRS are SMH (Semiconductor Index), BBH (Biotechnology Index), PPH (Pharmaceutical Index), and OIH (Oil Service Index).

    iShares - Issued by Barclays Global Investors, there are currently 79 different iShares. Of these, there are 9 that trade an average daily volume of at least 300,000 shares per day (based on the monthly average daily volume of the past three months). The composition of iShares consists of the following types of ETFs: industry/sector tracking, S&P/Russell (broad-based) index tracking, international equities, and the recently launched fixed-income shares. The fixed-income iShares, launched in July 2002, allow you to actively trade corporate and government bonds, just like you do with stocks. Being an equities trader, I personally am very excited to start trading these fixed-income ETFs.

    SPDRS - There are currently 11 different SPDRS (pronounced "spiders") which is an acronym for Standard & Poor's Depositary Receipts. Each SPDR is either issued by State Street Securities or PDR Services, LLC. Of these, there are 6 that trade an average daily volume of at least 300,000 shares per day (based on the monthly average daily volume of the past three months). Two of the SPDRS are broad-based(SPY and MDY), while the rest track specific market sectors or industries (Select Sector SPDRS). The most popular SPDR is SPY, which trades an average daily volume of over 37 million shares and is composed of the equities in the S&P 500 index. Also popular are MDY (MidCap SPDR) and XLF (Financial Sector SPDR), each of which trade about 2 million shares per day.

    In addition to the above, there are also 8 ETFs in the streetTRACKS family, as well as the Fortune 500 and Fortune 50 tracking stocks, all from State Street Brokerage. Finally, there are two ETFs in the VIPER family from Vanguard. All twelve of these ETFs are too illiquid for short-term trading, so they do not warrant much additional discussion.

    Although ETFs are relatively new, they are quickly becoming the rage for traders looking for better trending, better diversified, and lower overnight risk positions. As they continue to grow in popularity, more trading opportunities will arise as average daily volume increases and new ETFs are issued. There are presently 23 ETFs with an average daily volume greater than 300,000 shares per day, enabling a wide selection of daily trading opportunities.

    We are currently working on a comprehensive database of ETFs that are suitable for short-term trading. The ETFs will be grouped by type (sector tracking, broad-market tracking, international, or fixed-income) and will include data such as the individual securities that comprise each ETF. I will share this database with everyone when it is completed.
  3. Why do I get the feeling I smell marketing bullshit brewing in this thread. . .

    Let me guess - you've got just the trading plan to trade the ETFs, HOLDRs, etc, for sale
  4. I trade ETFs with my own real, live $$ every day of the week and I am really sold on it. I am looking for others who feel the same and want to discuss with them. There is not much information on short-term trading of ETFs on the web, so I am seeking others with a similar interest. Sorry if it had marketing overtone.
  5. Is this really called for? He didn't push his website on anyone. Come on guys!
  6. stockman

    stockman Guest

    In his original post, he had a huge link to his own website, which hawked all of his "services" related to ETFs. Must of edited the post. Doesn't change anything though.
  7. "Must of"? Is that Ingles?
  8. Didn't see that, but who really cares? If it upsets you so much, why not just ignore it?

    I love this site, and Baron deserves a ton of credit. But the only thing I dislike is posters that hide behind their keyboards and monitors and take potshots at people. You see a lot of these posts aimed at Don Bright. In my opinion, that is what you were doing. If I am wrong, I apologize.

    Sometimes I wonder if the poster of this negativity is making any money at all with his trading. Hell, the more I look at some of the posters on here that average more than 2 or 3 posts per day, makes you wonder if they trade at all.
  9. Brandonf

    Brandonf ET Sponsor

    Hey Deron welcome to ET. It's good to see someone posting things people can use for their trading and not just whining about this and that and argueing about that and this. Just ignore the knuckleheads, most people welcome good info.

  10. Magna

    Magna Administrator

    I also welcome you to ET Deron, thanks for posting your thoughts. As Brandon suggested, please ignore the idiots and post away.
    #10     Aug 23, 2002