Exchange Traded Funds –

What exactly are Exchange Traded Funds?

Exchange Traded Funds

Better known as ETFs, Exchange Traded Funds are like Mutual Funds in the respect that they represent a pool of securities gathered for a specific purpose or investment goal.  But the resemblance ends there.  ETFs are more versatile in that they trade on exchanges just like stocks, can be traded throughout the day, and today there are ETFs created for whatever purpose you could think up.  Originally designed to track the major indices like the S & P 500, the Nasdaq 100, the Dow Jones Industrial Average, and the Russell 2000, they have become much more specialized in the years since.  Now they offer the retail trader an efficient, inexpensive, and less risky alternative to short selling, the futures markets, currency trading, and global markets that were not available in this easy to trade vehicle before the advent of the Exchange Traded Fund.

Compared to Mutual Funds, ETFs have a much greater transparency of purpose.  You have a clear understanding of what holdings make up each ETF, so you can balance a portfolio for growth and risk management.  Mutual Funds are a lot harder to dissect; so, if you own multiple funds, the chance of overlapping specific holdings without knowing it is very great.  Other advantages of ETFs are:

  • Lower Management Fees and no sales or advertising charges to lower performance, although normal brokerage commissions to buy and sell an ETF, like a stock, still apply.
  • Lower Minimum Investment Requirements – you can just buy one share.
  • Ability to be traded on margin and have options, like stocks.
  • Valuation is certain – they trade at a specific price, like stocks.  Mutual funds estimate their Net Asset Value at the end of the day.
  • Research and analysis is much easier with the greater transparency.

 

Managing a portfolio becomes very efficient with ETFs, and they can form the basis of your longer-term strategies, while minimizing risk through personal management of individual positions, elimination of the single stock event risk, and being able to use options to enhance returns or protect against volatility.  Because most ETFs have options, short-term Swing Trading is available, as well, making ETFs a perfect vehicle for managing a portfolio using diversified trading Styles and Methods.

 

What’s the Difference between an Exchange Traded Note (ETN) and an Exchange Traded Fund (ETF)?

ETNs are unsecured debt obligations issued by a bank or other financial institution.  Unlike bonds, though, they trade on exchanges during the day, like stocks and ETFs, and their performance is based on an underlying index or benchmark used to identify the purpose or investment objective of the ETN.  So far, there’s not much difference between an ETN and an ETF: they both track major market indices, industry sectors, foreign currencies, emerging market indices, commodities, and other assets.  ETNs also have leveraged and inverse products.  The differences come in when you look at the structure of the ETN versus the ETF:

  • ETNs are debt obligations backed by a financial institution; so, the credit standing of that financial institution is what is at risk, not anything to do with the assets in the benchmark.  Since a major bank is usually behind ETNs, this concern is minimal except in times of unusual stress as was witnessed in the 2008/2009 market collapse.
  • ETNs do not buy and hold assets to replicate the benchmark they’re using, whereas ETFs are investment companies and own the assets that make up the index or benchmark they are following.  As an owner of an ETF, you own shares of a fund that represent an ownership interest in the underlying group of assets.
  • ETNs can be more complex and specialized in nature; so, a careful look is warranted to understand their structure before using an ETN.

I bring this up only to highlight the difference and make everyone aware that there is a difference.  Hope this helps to clear up any confusion you might have had.  It will be rare that you’ll use an ETN, since ETFs have the coverage needed in most situations.  Even with leveraged and inverse ETNs that you might run across, the advantage of using them in any trading strategy is minimal, because of their short-term nature, and using options on regular ETFs serve the same purpose with less risk

 

What do Exchange Traded Funds Look Like?

It took me awhile to get a handle on all the ETFs on the market, and, in the end, it all came down to using those ETFs with the highest volume to insure liquidity and those with the highest option volume, so you had the versatility to manage most any position or strategy.  Take a look at my High Option Volume ETFs to get an idea of the scope of that list.

To see what ETFs look like and the variety that’s available, I’ve put together a representative list of categories with some more popular ETFs.  The universe of ETFs is much larger and offers the investor a myriad of ways to structure a portfolio; so, just know that the extended list of ETFs exists for specialized situations, but, here at The Diversified Trader and at most educational and trading services, you’ll find smaller, more targeted lists being used.

 

 

Exchange Traded Funds (ETFs)

 

U.S. MARKET EQUITY INDEXES:

Symbol Description
SPY S&P 500
DIA DOW JONES INDUSTRIAL AVERAGE
MDY S&P MID-CAP 400
IWM RUSSELL 2000
QQQ NASDAQ 100
IYT TRANSPORTATION AVERAGE

 

U.S. MARKET (S&P 500) SECTORS:

Symbol Description
XLE ENERGY
XLB MATERIALS
XLF FINANCIALS
XLF FINANCIAL SERVICES
XLI INDUSTRIALS
XLV HEALTH CARE
XLY CONSUMER DISCRETIONARY
XLRE REAL ESTATE
XLP CONSUMER STAPLES
XLK TECHNOLOGY
XLU UTILITIES

 

INDUSTRY GROUPS:

Symbol Description
GDX GOLD MINERS
IYZ US TELECOMMUNICATIONS
IGV NORTH AMERICA TECH-SOFTWARE
SMH SEMICONDUCTOR
IGN NETWORKING & MULTIMEDIA
IGE NORTH AMERICA NATURL RESOURCES
ITA US AEROSPACE & DEFENSE
IBB BIOTECHNOLOGY
IHI US MEDICAL DEVICES
IHE US PHARMACEUTICALS
IHF US HEALTHCARE PROVIDERS
IAT US REGIONAL BANKS
IAK US INSURANCE
IYG US FINANCIAL SERVICES
IAI US BROKER DEALERS
IYK US CONSUMER GOODS
IYC US CONSUMER SERVICES
XHB S&P HOME BUILDERS
IEO US OIL & GAS EXPLORATION
IEZ US OIL EQUIPMENT & SERVICES
IYR US REAL ESTATE
ICLN GLOBAL CLEAN ENERGY
DBC COMMODITIES
MOO AGRIBUSINESS

 

GLOBAL EQUITY INDEXES:

Symbol Description
EFA LARGE/MID-CAP INTERNATIONAL
EEM EMERGING MARKETS
FXI CHINA LARGE CAP
EWZ BRAZIL LARGE-CAP
EWJ JAPAN LARGE CAP
EWW MEXICO LARGE CAP

 

CORPORATE BONDS:

Symbol Description
AGG US AGGREGATE BOND FUND
BND VANGUARD TOTAL BOND MARKET

 

TREASURIES:

Symbol Description
SHY 1-3 YR TREASURY BOND FUND
IEI 3-7 YR TREASURY BOND FUND
IEF 7-10 YR TREASURY BOND FUND
TLH 10-20 YR TREASURY BOND FUND
TLT 20+ YR TREASURY BOND FUND
TIP “TIPS” BOND FUND

 

HIGH YIELD:

Symbol Description
HYG HIGH YIELD CORP BOND FUND
AMLP ALERIAN MLP INDEX FUND
MLPX GLOBAL MLP & ENERGY INDEX FUND

 

REAL ESTATE INVESTMENT TRUSTS (REIT’S):

Symbol Description
VNQ VANGUARD REIT INDEX

 

PRECIOUS METALS:

Symbol Description
GLD GOLD TRUST
SLV SILVER TRUST
PTM UBS PLATINUM INDEX ETN

 

ENERGY:

Symbol Description
USO U. S. OIL FUND
UNG U. S. NATURAL GAS FUND
KOL COAL FUND

 

CURRENCIES:

Symbol Description
UUP US DOLLAR INDEX
FXY JAPANESE YEN
FXE EURO

 

LEVERAGED ETFs – LONG

Symbol Description
SSO ULTRA S&P 500 2X
SPXL S&P 500 BULL 3X
QLD ULTRA QQQ 2X
TQQQ ULTRAPRO QQQ 3X
UWM ULTRA RUSSELL 2000 2X
TNA RUSSELL 2000 BULL 3X
ROM ULTRA TECHNOLOGY 2X
TECL TECHNOLOGY BULL 3X
MVV ULTRA MID CAP 400 2X
MIDU MID CAP 400 BULL 3X
UYG ULTRA FINANCIALS 2X
FAS FINANCIALS BULL 3X
URE ULTRA REAL ESTATE 2X
DRN REAL ESTATE BULL 3X
USD ULTRA SEMICONDUCTOR 2X
SOXL SEMICONDUCTOR BULL 3X

 

LEVERAGED ETFs – SHORT

Symbol Description
SDS ULTRASHORT S&P 500 2X
SPXS S&P 500 BEAR 3X
QID ULTRASHORT QQQ 2X
SQQQ ULTRAPRO SHORT QQQ 3X
TWM ULTRASHORT RUSSELL 2000 2X
TZA RUSSELL 2000 BEAR 3X
REW ULTRASHORT TECHNOLOGY 2X
TECS TECHNOLOGY BEAR 3X
MZZ ULTRASHORT MID CAP 400 2X
MIDZ MID CAP 400 BEAR 3X
SKF ULTRASHORT FINANCIALS 2X
FAZ FINANCIALS BEAR 3X
SRS ULTRASHORT REAL ESTATE 2X
DRV REAL ESTATE BEAR 3X
SSG ULTRASHORT SEMICONDUCTOR 2X
SOXS SEMICONDUCTOR BEAR 3X

 

For more research on ETFs, ETNs, and such, go to:

 

To Building Wealth,

 

Scan0007
Ted Bliss
Your Research & Development Coordinator
TheDiversifiedTrader.com

 

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