If you are new to trading, you will quickly learn there are many different vehicles to trade. ETF’s (Exchange Traded Funds) are just one of the choices. ETF’s came about in the early 90’s. They then became popular in 2008 after the U.S. Securities and Exchange Commission began to allow actively managed ETF’s. There are now more than 1600 ETF’s and more being added every day. There is now more than $2 trillion in assets being managed in ETF’s. However, the newer ones are lower volume. Check the daily volume before investing or trading an ETF. The SPDR S&P 500 ETF Trust (SPY) ETF is the highest daily volume ETF, with an average approaching 200 million shares traded. SPY has net assets around $160 billion. Below in the chart of SPY you will see the volume was well over 200 million shares in late 2015 and early 2016.
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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