ETF Trading Strategy Update: Are Oversold Bond ETFs a Buy?
With stocks soaring on Tuesday, the ranks of oversold ETFs were fewer than usual as of Wednesday morning’s open.
This is to be expected. When markets move higher, more ETFs move from neutral territory to overbought territory and from oversold territory to neutral. This is the natural movement in ETFs as buyers bid shares higher, pushing markets toward overbought levels and as sellers move to cash, adding more shares to the market, helping depress prices and create oversold conditions.
Are you new to exchange-traded funds (ETFs)? Be sure to read our ETF primer, ETF Basics: What You Need to Know About Exchange-Traded Funds.
Looking at the ETF market right now, most ETFs are overbought. However there is a cohort of exchange-traded funds (ETFs) that are trading above their 200-day moving averages and have pulled back into oversold territory in recent days. These ETFs are bond ETFs.
Bond ETFs are exchange-traded funds that are linked to the bond markets rather than the stock markets. These exchange-traded funds are often built to keep pace with a specific bond index that itself may track government long or short term bonds, corporate bonds (including both investment grade and high yield or “junk” bonds), as well as international and emerging markets bonds.
For traders who do not have the ability to invest directly in bonds – which often takes a considerable amount of capital – bond ETFs can be an excellent alternative to get exposure to the bond market. And for traders looking to take advantage of short term opportunities in oversold or overbought markets, bond ETFs can be a worthwhile trading vehicle, as well.
Among the more widely traded bond ETFs are three that are in oversold territory above their 200-day moving averages. These bond ETFs include the iShares iBoxx Investment Grade Corporate Bond ETF
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PowerRating). Should these ETFs continue lower, they could represent potential opportunities to the long side as their increasingly oversold conditions attract buyers.
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David Penn is Editor in Chief at TradingMarkets.com.