Here’s Why I Like ETFs
The
market spent the day cheering George Bush as the S&P finally broke
through its upper channel line resistance. Volume came in strong and solid
institutional accumulation was apparent. It will now be important to see how
the market acts post-breakout. Â Further follow-through or a light pullback on
decreasing volume would be good news. The thing to avoid is a high volume
reversal day soon after this strong move. One notable potential short-term
negative today was the fact that the VIX dropped very sharply and is now
extremely oversold. This could mean that a pullback is likely. It doesn’t mena
that the pullback has to be vicious, though. I would certainly be trading the
market with a long bias at this point.
Like many traders, I have
developed a strong liking for ETF’s. As tradeable vehicles, I believe they are
extremely useful. Two of the most obvious benefits to using ETF’s is their
liquidity and the instant diversification that they offer. While many of them
do offer a significant amount of diversification, traders should understand that
some of them are actually quite concentrated.
Popular ETF’s like the SPY and
the QQQ offer a substantial amount of diversification. Other popular ETF’s like
the BBH (Biotech Holdrs) and SMH (Semiconductor Holdrs) do not. This is not
necessarily a drawback, but something that should be considered and factored
into traders’ decision making of whether they are actually the proper vehicle to
achieve the purposes the trader has in mind.Â
Take the BBH for example. As
of 8/31/04, a list of the top 10 holdings shows that Genentech comprises 32% of
the BBH and Amgen 26%. That means 58% of the value of the BBH is determined by
just two companies. If your looking to gain exposure to the Biotech sector, BBH
can help you do that. If you are looking to be broadly diversified across the
sector, you may want to consider other options. Another ETF that provides
exposure to the Biotech sector is the Ishares Nasdaq Biotech Fund (IBB). While
Amgen still represents a fairly hefty 19% of the market value here, the next
largest holding is Biogen at 6%. Everything else is under 4%.
Semiconductor stocks are
another example, with SMH comprised of a fairly concentrated group of
semiconductor companies and IGW a more diversified 2nd option.
Make sure you have a grasp of
the underlying assets that make up an ETF before buying or shorting it. If you
would like more information on ETF’s,
www.etfconnect.com can be an excellent resource.
Best of luck with your trading,
RobÂ
Â