An ETF, Exchange Traded Fund, is an open-ended fund that holds shares of many stocks from the sector they represent. SPY is an ETF that mirrors the S&P 500. It holds shares of S&P 500 stocks. The largest holdings in SPY include Apple, Microsoft, Exon Mobil, General Electric, Johnson and Johnson, Facebook and Google. Think of an ETF has a hybrid of mutual funds and individual stocks. It allows you to diversify like a mutual fund and trade during market hours like an individual stock.
ETF’s can be traded long or short, just like most stocks. If you have a IRA or 401K, short trades are not allowed due to SEC rules. Inverse ETF’s allow you to take a long trade in a down market. They trade the reverse of the underlying ETF. Let’s continue to use SPY as the example. One of the inverse ETF’s for SPY is SDS. In the chart below you can see how SDS, orange, went up in late 2008 and at the same time SPY, green, went down. Then in 2009 you will see when the markets started to recover, SPY started to go up again and SDS started trading lower.
I will discuss why to trade ETF’s in the next blog.
I hope this was helpful.
Simpler is Better,
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