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 than Mutual Funds in that they trade on exchanges just like stocks, trade throughout the day, and have real-time valuations.

Today there are ETFs created for most any 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.

ETFs 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 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.  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:

SymbolDescription
SPYS&P 500
DIADOW JONES INDUSTRIAL AVERAGE
MDYS&P MID-CAP 400
IWMRUSSELL 2000
QQQNASDAQ 100
IYTTRANSPORTATION AVERAGE

 

U.S. MARKET (S&P 500) SECTORS:

SymbolDescription
XLEENERGY
XLBMATERIALS
XLFFINANCIALS
XLCCOMMUNICATION SERVICES
XLIINDUSTRIALS
XLVHEALTH CARE
XLYCONSUMER DISCRETIONARY
XLREREAL ESTATE
XLPCONSUMER STAPLES
XLKTECHNOLOGY
XLUUTILITIES

 

INDUSTRY GROUPS:

SymbolDescription
GDXGOLD MINERS
IYZUS TELECOMMUNICATIONS
IGVNORTH AMERICA TECH-SOFTWARE
SMHSEMICONDUCTOR
IGNNETWORKING & MULTIMEDIA
IGENORTH AMERICA NATURL RESOURCES
ITAUS AEROSPACE & DEFENSE
IBBBIOTECHNOLOGY
IHIUS MEDICAL DEVICES
IHEUS PHARMACEUTICALS
IHFUS HEALTHCARE PROVIDERS
IATUS REGIONAL BANKS
IAKUS INSURANCE
IYGUS FINANCIAL SERVICES
IAIUS BROKER DEALERS
IYKUS CONSUMER GOODS
IYCUS CONSUMER SERVICES
XHBS&P HOME BUILDERS
IEOUS OIL & GAS EXPLORATION
IEZUS OIL EQUIPMENT & SERVICES
IYRUS REAL ESTATE
ICLNGLOBAL CLEAN ENERGY
DBCCOMMODITIES
MOOAGRIBUSINESS

 

GLOBAL EQUITY INDEXES:

SymbolDescription
EFALARGE/MID-CAP INTERNATIONAL
EEMEMERGING MARKETS
FXICHINA LARGE CAP
EWZBRAZIL LARGE-CAP
EWJJAPAN LARGE CAP
EWWMEXICO LARGE CAP

 

CORPORATE BONDS:

SymbolDescription
AGGUS AGGREGATE BOND FUND
BNDVANGUARD TOTAL BOND MARKET

 

TREASURIES:

SymbolDescription
SHY1-3 YR TREASURY BOND FUND
IEI3-7 YR TREASURY BOND FUND
IEF7-10 YR TREASURY BOND FUND
TLH10-20 YR TREASURY BOND FUND
TLT20+ YR TREASURY BOND FUND
TIP“TIPS” BOND FUND

 

HIGH YIELD:

SymbolDescription
HYGHIGH YIELD CORP BOND FUND
AMLPALERIAN MLP INDEX FUND
MLPXGLOBAL MLP & ENERGY INDEX FUND

 

REAL ESTATE INVESTMENT TRUSTS (REIT’S):

SymbolDescription
VNQVANGUARD REIT INDEX

 

PRECIOUS METALS:

SymbolDescription
GLDGOLD TRUST
SLVSILVER TRUST
PTMUBS PLATINUM INDEX ETN

 

ENERGY:

SymbolDescription
USOU. S. OIL FUND
UNGU. S. NATURAL GAS FUND
KOLCOAL FUND

 

CURRENCIES:

SymbolDescription
UUPUS DOLLAR INDEX
FXYJAPANESE YEN
FXEEURO

 

LEVERAGED ETFs – LONG

SymbolDescription
SSOULTRA S&P 500 2X
SPXLS&P 500 BULL 3X
QLDULTRA QQQ 2X
TQQQULTRAPRO QQQ 3X
UWMULTRA RUSSELL 2000 2X
TNARUSSELL 2000 BULL 3X
ROMULTRA TECHNOLOGY 2X
TECLTECHNOLOGY BULL 3X
MVVULTRA MID CAP 400 2X
MIDUMID CAP 400 BULL 3X
UYGULTRA FINANCIALS 2X
FASFINANCIALS BULL 3X
UREULTRA REAL ESTATE 2X
DRNREAL ESTATE BULL 3X
USDULTRA SEMICONDUCTOR 2X
SOXLSEMICONDUCTOR BULL 3X

 

LEVERAGED ETFs – SHORT

SymbolDescription
SDSULTRASHORT S&P 500 2X
SPXSS&P 500 BEAR 3X
QIDULTRASHORT QQQ 2X
SQQQULTRAPRO SHORT QQQ 3X
TWMULTRASHORT RUSSELL 2000 2X
TZARUSSELL 2000 BEAR 3X
REWULTRASHORT TECHNOLOGY 2X
TECSTECHNOLOGY BEAR 3X
MZZULTRASHORT MID CAP 400 2X
MIDZMID CAP 400 BEAR 3X
SKFULTRASHORT FINANCIALS 2X
FAZFINANCIALS BEAR 3X
SRSULTRASHORT REAL ESTATE 2X
DRVREAL ESTATE BEAR 3X
SSGULTRASHORT SEMICONDUCTOR 2X
SOXSSEMICONDUCTOR BEAR 3X

 

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

 

To Building Wealth,

 

Scan0007
Ted Bliss
Your Research & Development Coordinator
TheDiversifiedTrader.com