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Thread: ETF's . What are they?

  1. #1

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    Default ETF's . What are they?

    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/2...iss_etf_JW.htm

    Other than that, I know very little.

    Please help enlighten me.

    Thanks


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  3. #2

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    Default Re: ETF's . What are they?

    Quote Originally Posted by James View Post
    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:



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

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  5. #3

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    Default Re: ETF's . What are they?

    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?

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  7. #4

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    Default Re: ETF's . What are they?

    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/20...etfs-work.html
    -- Tom | My Trades

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  9. #5

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    Default Re: ETF's . What are they?

    -- Tom | My Trades

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  11. #6

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    Default Re: ETF's . What are they?

    -- Tom | My Trades

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  13. #7

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    Default Re: ETF's . What are they?

    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

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  15. #8

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    Default Re: ETF's . What are they?

    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%.
    -- Tom | My Trades

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  17. #9

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    Default Re: ETF's . What are they?

    Exploring ETFs from iShares... http://www.exploringetfs.com/?ut=ga
    -- Tom | My Trades


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  19. #10

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    Default Re: ETF's . What are they?

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

    Lady

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