Tuesday, February 23, 2010

Using ETFs

How can I use ETFs in my trading?
We already talked about what an ETF is and what it represents, now we'll talk about how to use them in your trading

ETFs are an excellent way to gain exposure to the price of something (an index, a sector, the price of a commodity, the list is endless) without going through the difficulties of acquiring the actual underlying securities. We talked about how just by buying SPDRs (ticker: SPY) you are actually buying the 500 components of the S&P 500 index. Now we will talk about more complex ETFs and how I use them in my actual real trading. Nowadays I buy ETFs on a regular basis mainly because:

  • It's a fast and easy way to gain exposure to a basket of securities without figuring out which ones to buy.
  • It provides instant diversification, thereby lowering risk (it is quite unlikely that an ETF will lose 90% of its value in a day since all its components would have to decline simultaneously whereas a stock can easily fall by that much, for example by declaring bankruptcy).
  • It gives me the ability to gain levered exposure to a market or to a sector by using the ETFs that utilize leverage in their construction.
  • Most importantly, it allows me to take short positions on indices, sectors, etc. without actually going through the hassle of selling short (which is not always possible) or doing it through options (buying puts, selling calls or through bearish spreads).
  • The same way some ETFs provide leverage on the upside, levered inverse ETFs do the same on the downside.
These are the ETFs that I trade on a regular basis

ETFs that track indices:
SPY  S&P 500
DIA  Dow Jones Industrial Average
IWM  Russell 2000
QQQQ Nasdaq-100

ETFs that track indices with leverage:
SSO  Twice the daily performance (200%) of the S&P 500
DDM  Twice the daily performance (200%) of the Dow Jones Industrial Average
UWM  Twice the daily performance (200%) of the Russell 2000
QLD  Twice the daily performance (200%) of the Nasdaq-100

Inverse ETFs (they go up when the index goes down):
SH   Inverse daily performance (-100%) of the S&P 500
DOG  Inverse daily performance (-100%) of the Dow Jones Industrial Average
RWM  Inverse daily performance (-100%) of the Russell 2000
PSQ  Inverse daily performance (-100%) of the Nasdaq-100

Double Inverse:
SDS  Twice the inverse daily performance (-200%) of the S&P 500
DXD  Twice the inverse daily performance (-200%) of the Dow Jones Industrial Average
TWM  Twice the inverse daily performance (-200%) of the Russell 2000
QID  Twice the inverse daily performance (-200%) of the Nasdaq-100

Sector SPDRs (US companies divided by sector):
XLB  Materials
XLE  Energy
XLI  Industrials
XLV  Health Care
XLK  Technology
XLP  Consumer Staples
XLY  Consumer Discretionary
XLF  Financials
XLU  Utilities

Sectors with leverage (and inverse):
FAS and FAZ  Triple (300%) the daily performance of Financials and its triple inverse (-300%).
ERX and ERY  Triple (300%) the daily performance of Energy stocks and its triple inverse (-300%).
UYM and SMN  Twice (200%) the daily performance of Materials stocks and its double inverse (-200%)
URE and SRS  Twice (200%) the daily performance of the Real Estate sector and its double inverse (-200%)
DIG and DUG  Twice (200%) the daily performance of the Oil and Gas sector and its double inverse (-200%)

International:
EEM  Emerging Markets
EWZ  Brazil
EWW  Mexico
EWJ  Japan
FXI  China

Forex:
UUP  US Dollar
FXE  Euro
FXC  Canadian Dollar

Specific Industries:
SMH  Semiconductors
XRT  Retailers
GDX  Gold Miners
OIH  Oil Services
IYR  US Real Estate
XHB  Homebuilders
KBE  Banking
KIE  Insurance
KRE  Regional Banking
KCE  Capital Markets

Commodities:
GLD  Gold
SLV  Silver
USO  Crude Oil
UNG  Natural Gas
UGA  Gasoline

Bonds:
TLT  Long-term bonds (+20 yrs)
TBT  Inverse of long-term government bonds (+20 yrs)
LQD  Investment grade corporate bonds
JNK  High yield corporate bonds.
TIP  Inflation-protected government securities.