ETF's . What are they?

[James]

How about a good description of exact WHAT IS AN ETF?

How is an exchange traded fund different from a stock, or an index fund?

Let's give a couple examples- SPY, and SDS come to mind.

How do they work, and what can you tell me about them?

All I know so far is what I've read here:
http://www.indexfunds.com/articles/20001019_ETFFAQ_iss_etf_JW.htm

Other than that, I know very little.

Please help enlighten me.

Thanks

[etftalk]

How about a good description of exact WHAT IS AN ETF?
In very basic terms, you are trading a basket of stocks, rather than individual stocks. They can be similar to an index fund except they are easier to trade.


How is an exchange traded fund different from a stock, or an index fund?
An ETF is traded the same way as a stock as far as buying shares goes, but you can't really trade an index fund like a stock. That is usually done in the futures market, which is so highly leveraged that not every can stomach it.

With an S&P 500 ETF, let's use SPY as an example, if the S&P 500 goes up or down 1%, the SPY will also go up or down 1% (give or take).

If you were instead trading the S&P 500 mini futures, a 1% move could double your investment or cut it in half. A one point move in the S&P mini will make or lose you $50 per contract. So if the S&P goes down 1% (or 9-points based on today's prices) you would be down $450 for each contract.

With the SPY ETF, you buy shares. At about $93 a share currently, if the S&P 500 went down 1%,the SPY would drop to just over $92. If you owned 100 shares, you'd be down less than $100.

That's not a great explanation, but it shows how much more leveraged the futues are, and how you can trade an index fund ETF without risking everything.



Let's give a couple examples- SPY, and SDS come to mind.

How do they work, and what can you tell me about them?

As discussed above, SPY will basically mirror the S&P 500. You buy X number of shares of SPY, and that investment or trade will go up or down in the virtually same proportion to the S&P 500.

The SDS is a "short" or inverse ETF. You buy shares of this to short the S&P 500 meaning, if the S&P 500 goes up, the share prices of SDS would go down. If the S&P 500 goes down, SDS goes up. But SDS also happens to be an Ultra ETF, meaning it moves 2x that of the S&P 500.

Example:
S&P 500 goes up 1% = SDS will be down about 2%
S&P 500 goes down 1% = SDS will be up about 2%

There is also a poplular Ultra long S&P 500 ETF called SSO.

S&P 500 goes up 1% = SSO will be up about 2%
S&P 500 goes down 1% = SSO will be down about 2%

Just to confuse you further, you can sell short shares of ETFs. Even the Short ETFs.

Selling short the SDS is virtually the same as buying the SSO (you are long the S&P).
Selling short the SSO is virtually the same as buying the SDS (you are short the S&P).

You can find a decent list of some popular ETF's from ProShares here: http://www.proshares.com/funds. It includes Ultra and Short ETFs.

Here's a list from decisionpoint.com with prices thru 1/02/09. I don't believe any of these are Ultras or Shorts:

http://www.etftalk.com/images/forum/etfs.png

I hope this helps. I'm sure this will trigger more questions, which is great!

[James]

Which are the "Ultra" shares, for the S&P, which move at twice or more the movement of S&P500?

SDS, and SSO. Correct?

Are there any 3X shares, or just 2X shares?

I'm going to start tracking them via a P&F chart.

Finally, how the heck are they able to do 2X shares, anyway?
I mean, What do they leverage them with?
I don't understand the mechanics. How is that possible to get a 2X movement?

[etftalk]

Which are the "Ultra" shares, for the S&P, which move at twice or more the movement of S&P500?

SDS, and SSO. Correct?
Yes:

SSO = 2 x long
SDS = 2x short


Are there any 3X shares, or just 2X shares?
Long = BGU, Short = BGZ. As you might expect, they are more thinly traded than the SSO and SDS, but actually not too bad.


Finally, how the heck are they able to do 2X shares, anyway?
I mean, What do they leverage them with?
I don't understand the mechanics. How is that possible to get a 2X movement?

I never thought about this, and ProShares does not explain it. I would assume they use options, margin, futures, etc. to get it to work. Something else I better look up. Here's a half answer that I found...
http://stockchartist.blogspot.com/2008/06/how-do-ultrashort-etfs-work.html

[etftalk]

Part 1

http://www.youtube.com/watch?v=r2ChdlHOa9Q

[etftalk]

Part 2

http://www.youtube.com/watch?v=3Ea-1zp7398

[XL-entLady]

I've noticed a lot of Proshares ETF symbols on the MB. When I was making up my initial watch list I used a lot of the Barclays iShares ETFs. Is there a big difference between the two?

Thanks,

Lady

[etftalk]

ProShares are more aggressive. The Ultras can move in multiples of the index they track, (S&P 500 up 1%, SSO would be up 2%, etc.). You can also purchase short ETFs - also in multiples. S&P 500 down 1%, SDS would be up 2%.

[etftalk]

Exploring ETFs from iShares... http://www.exploringetfs.com/?ut=ga (http://www.exploringetfs.com/?ut=ga)

[XL-entLady]

Thanks, Tom. I knew I could count on you to know the answer! :)

Lady

[teknobucks]

many of the ultra's are funny money......


SSO 4 exp:

The investment seeks daily investment results, before fees and expenses, which correspond to twice the daily performance of the S&P 500 index. The fund normally invests 80% of assets in financial instruments with economic characteristics that should be twice the return of the index. It may employ leveraged investment techniques in seeking its investment objective. The fund is nondiversified.





derivative swaps that mimic 2X or 3X...blah blah blah

which leads into the counterparty risk reality of um all

this bbs spends hours hashing it over and over and over.... http://www.tickerforum.org/cgi-ticker/akcs-www
they are an interesting bunch to read..... has an obviously bearish tilt & really wtf do you do with all the tin foil after u eat it???...lol


curious where most of you absorb info from the net regarding stocks?


my daily reading links below

http://1link.in/mnure

[XL-entLady]

curious where most of you absorb info from the net regarding stocks?


my daily reading links below

http://1link.in/mnure
Thanks for sharing! FWIW, my daily reading and viewing, in no particular order, is:

http://www.alphatrends.blogspot.com/
http://jasonkelly.com/
http://www.traders-talk.com/
http://www.greenfaucet.com/
http://quantifiableedges.blogspot.com/
http://marketsci.wordpress.com/
http://garyscommonsense.blogspot.com/
http://seekingalpha.com/
http://safehaven.com/
http://www.iepstein.com/ExternalApps/Full/FuturesTV/IndexReviewVideo.aspx

Yes, you're right. I have no life. :rolleyes: :toung:

Lady

[XL-entLady]

So back to the subject of this thread, what is the difference between an ETF and ... say ... a mutual fund?

And how many rookie questions am I allowed per day? :embarrest:

Lady

[etftalk]

Some ETFs are jsut like index mutual funds but much more liquid and easy to trade. Non-index mutual funds are generally managed and this have fees associated with them.

Hear a better explanation in the videos of post #5 and #6 (http://www.etftalk.com/forum/showthread.php?t=288) of this thread.

[XL-entLady]

So here's another rookie question. :embarrest:

Say you're going to be out of touch for a while. Away from a computer and the phone. Or you just need to step back and catch your breath for a day or two. Where do you park your trading account in those cases? Do you find a bond ETF that appears fairly stable? (Recognizing that you'll get basically zip for returns there, of course.) Or what?

Will you please take a moment to share your preferred methods with this fledgling investor?

And do I need to start a new thread entitled, "Dumb Rookie Questions"? :rolleyes:

Lady

[XL-entLady]

So here's another rookie question. :embarrest:

Say you're going to be out of touch for a while. Away from a computer and the phone. Or you just need to step back and catch your breath for a day or two. Where do you park your trading account in those cases? Do you find a bond ETF that appears fairly stable? (Recognizing that you'll get basically zip for returns there, of course.) Or what?

Will you please take a moment to share your preferred methods with this fledgling investor?

And do I need to start a new thread entitled, "Dumb Rookie Questions"? :rolleyes:

Lady
So I am guessing from the lack of responses to my question that everyone rolled their eyes and thought to themselves that I should just stick everything in a money market fund? If I don't hear differently I will assume that is the safe haven of choice for everyone .... :)

Lady

[etftalk]

I missed this one Lady. I'd say cash / money market, in my case. Sorry for the delay.

[XL-entLady]

I missed this one Lady. I'd say cash / money market, in my case. Sorry for the delay.
No worries! I probably wasn't as patient as I should have been, but that was because it was such a dumb question I felt silly asking it. :rolleyes:

I've stressed over my tiny (but growing :)) e-Trade account a lot more than I ever stressed over my mega-huge government IRA-type account. I think that is because I learned what to do with my govt account gradually over many years. And the lessons learned in 2002-3 were painful ones! :wacko: With my ETF account I just kind of jumped in with a thousand to learn how to swim.

But I'll keep asking the stupid questions because maybe others will be as green as I am and the answers might help them too. :bigsmile:

Thanks for all your help, Tom! And Teknobucks and Show-me and Bullitt and Spaf and ....

Lady

[teknobucks]

may want to be in t bills....or gold...lol

think products are
columbia cash reserves at bac

fdlxx at fidelity

forgot the others...but u know govt backed blah blah

[Bullitt]

Lady, it's a tough call. How confident are you in your position? I bought TNA at an average cost of 27 a few weeks ago and watched 'em take it down without stops, but there were days I didn't check it even once. Obviously I could have gotten in at a better price, but what can you do, I got emotional and thought I'd catch it before hitting the pivot price. I don't know, it's the big trends I'm looking for and it's been up since November so until that gets violated....

It all depends on whether you look at the short or long term I guess. Beware stop loss orders, they can cost you just as much as buy and hold. Since buy and hold is a tough sell these days, I can see the crooks promoting stop loss orders in the years ahead. Shoot, Scottrade is holding classes on stop orders at some of their branches!

[XL-entLady]

Found another article that helps explain ETFs in global terms. Not much detailed information, but lists topics for further study.

5 Things Every Investor Should Know About ETFs

By Tom Lydon (http://www.dailymarkets.com/author/tomlydon/) on February 7, 2009

After diving into the world of exchange traded funds (ETFs), are you now wondering what to look for? Come and take a gander.
ETFs offer exposure to most sectors and asset classes with the added bonus of being liquid, transparent and tax efficient, writes Dan Burrows for SmartMoney (http://www.smartmoney.com/Investing/ETFs/5-Things-Every-ETF-Investor-Should-Know/).


While ETFs are indeed funds, an investor should still treat them like stocks. But unlike stocks, ETFs have a few identifiable quirks to look out for:

Research. You need to know what you’re getting yourself into. The transparency in ETFs are because of the underlying index they track, so it is prudent to look over the components and allocations of that benchmark.
Tracking error. ETFs try to replicate the returns of the underlying index and it sometimes does diverage from the actual value. in 2008, listed ETFs in the United States had an average tracking error of about 0.5%. Wider tracking errors tend to occur more often in global ETFs because of global time differences.
Buy with limit. Never use market orders when buying ETFs. When specialists execute your trade, you will most likely not get the best price. Limit orders specify the price at which you may want to sell or buy.
Volume. Liquidity and volume size help maintain the efficient and correct prices for ETFs. We try to focus on ETFs with at least $50 million in assets. A $20 million ETF made up of many well-traded stocks can also be as good.
Taxes. An appealing attribute in an ETF is its tax efficiency, but it should be noted that a few ETFs do have capital gains distributions.
http://www.dailymarkets.com/stocks/2009/02/06/5-things-every-investor-should-know-about-etfs/

Lady

[XL-entLady]

More good information on ETFs from The Motley Fool. The quoted information is just the intro. There is a lot of good general ETF information, as well as great links for more data, in this article.

ETFs: The "It" Equity?
Bold, beautiful, cheap, and sassy, exchange-traded funds make traditional mutual funds look as exciting as granny in her flowered print dress. Here's why ETFs are the latest "it" equity.

By Seth Jayson
Wouldn't it be something to travel back in time and take a look at the seminal moments in investing history? Cave-men exchanging shiny rocks and pointed sticks for dinosaur steaks... traders swapping stocks under a Wall Street Buttonwood tree... John Bogle outlining his Master's thesis on index investing and later turning the moldy old mutual-fund world on its head.

We're a bit late to witness the birth of this century's latest "it" equity -- the Exchange Traded Fund (ETF) -- but we're in a good position to observe its meteoric rise. An ETF is similar to a mutual fund in that each share gives the holder a tiny piece of dozens, hundreds, or even thousands of companies that are held by the fund. Their cute-ish names -- like VIPERs, Spiders, Diamonds, and iShares -- belie the wallop that ETFs are giving investors and investment firms.

Why the breathless excitement? One reason is that they are simple vehicles for trading. Unlike mutual funds, ETFs trade all day long on the exchanges, just like stocks. ...." [more]

http://www.fool.com/etf/etf01.htm?source=InvAg

Lady