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.
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.