etf free report

7/28/2019 ETF Free Report

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FREE REPORT

Double, Triple or Even Quadruple Your

Returns Trading ETFs

David Penn

Senior Editor, TradingMarkets.com


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Double, Triple or Even Quadruple Your Returns Trading ETFs!

Exchange-traded funds are not just for investing any more. The increased tradingvolumes in exchange-traded funds now make them an asset class that is almost as easy totrade as individual stocksand far easier to trade than mutual funds with their high fees

and trading restrictions.

But volume is not the only reason why more and more traders are turning to ETFs tomake money in the short-term. The rise of leveraged and leveraged inverse exchange-traded fundsfunds that can double the return of the market they are trackinghavemade ETFs an even more attractive tool for the short-term trader.

Well show you why using exchange-traded funds unique ability to split the differencebetween trading the entire market and trading individual stocks, the surge in ETF tradingvolume and the ability to leverage your ETF trading two to four times, may encourageyou to make exchange-traded funds a part of your short-term trading in 2008 and beyond.

Why Trade ETFs?

As more and more traders and investors look to take advantage of the unique features ofexchange-traded funds, the increased volumes are making it easier and easier for short-term traders to take positions, allow the ETF to move, and then get out of those positionswhen they want to with minimal slipping.

That said, there is great variance in terms of the liquidity of different exchange tradedfunds. While some ETFs, such as the SPY, are as liquid as the most widely tradedstocks, some of the newer ETFs or some of the more esoteric ETFs tracking smaller

industries or less known countries or regions may experience lengthy periods where itseems as if not a soul is trading the ETF.

If the ETF is a sound one, based on a part of the economy or financial world that can beprofitably speculated on, then theres every reason to believe that the exchange-tradedfund will eventually gain the attention of investors and traders, becoming more liquid andtradable in the process. So if you find an ETF that you would like to trade, but areconcerned about the relatively low trading volumes, wait several weeks or a few monthsand check back to see whether or not the situation with regard to the ETFs liquidity hasimproved. Remember also that low liquidity can have a dramatic effect on bid/askspreads. So even if you are able to trade a low volume ETF, you may not be able to getinor outat the price you thought you would.

One of the biggest attractions of exchange-traded funds is how they allow traders andinvestors to take advantage of special situations. Maybe you had been following thenews in late 2006 and started to believe that the housing market was in real trouble. Howwould you take advantage of that conviction? Before ETFs, not only could ourimaginary trader not short an exchange-traded fund that tracked the performance of a set


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of the main homebuilders, but also even shorting the market using market-tracking ETFswould have been impossible.

For investors, the attraction of ETFs is their efficiency, transparency and low costcompared to mutual funds. For traders, the attraction to ETFs includes the ability to

minimize short-term single stock risk. Returning to the saga of our imaginary trader whois bearish on the housing market, in years past all this trader could do was look to short ahousing stockor a bunch of them. But which housing stock would fall the farthest? Ifhe or she decides to short a number of housing stocks to increase the chances of gettingthe one homebuilder that goes to zero, then there are still questions to be answered:how many should he or she short? And how does he or she select which ones?

Trading exchange-traded funds helps eliminate many of these worries. Think of ETFsare prepackaged meals, everything you need bundled into one convenient, easy to carryproduct. By shorting a sector ETF, not only does our trader avoid shorting the wronghousing stock (is there anything more aggravating than betting against the ONE stock in a

failing industry that doesnt go down?), but our trader also has a much more effective andefficient vehicle compared to shorting the market as a whole and hoping that the impactof the homebuilding slowdown will affect the broader market as severely as it would aspecialized basket of related stocks.

The Rise of the Leveraged ETF

One of the drawbacks to trading ETFs is that their compositiona compilation of the topstocks in a given index, sector or geographic regiontends to make them less volatilethan their individual components. In other words, Haliburton (HAL) is likely to havegreater volatility than an exchange-traded fund like the Standard and Poors EnergyETF

(XLE). This means, on the surface, traders will need to trade larger lots whentrading ETFs to get comparable bang for the buck that they would have gotten fromtrading many individual stocks.

And in another example of the continuing innovation in the financial industry, some ofthe companies responsible for creating exchange-traded funds came up with a solution inthe form of an old friend: leverage.


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The UltraShort Financial Sector ETF from ProShares

Leveraged ETFs strike directly at the problem of the relative lack of volatility inexchange-traded funds compared to individual stocks. By essentially leveraging by 2-1, atrader can dramatically make up for any lack of volatility in the exchange-traded fundwhile still making the identical trading decisions he or she would have made beforeleverage was involved.

In other words, rather than staying in a trade longer in an effort to wring out an additional

point or two, the same trade using an exchange-traded fund that is leveraged 2-1 willcapture more gains, easily doubling the returns of the same trade involving a non-leveraged ETF.

But the makers of leveraged ETFs have taken the game one step further by providingexchange-traded funds that are both leveraged and inversely tracked. These inverse ETFstrack the major indexes (as well as a number of other things, as well see in a moment),but do so in an inverse fashion. This means that traders can actually buy, rather thanshort, an exchange-traded fund that will gain in value as its related index or sectordeclines in value.

Varieties of Leveraged ETF

At this point, the number of leveraged exchange-traded funds is truly impressive. Firmslike ProShares offer a staggering array of leveraged exchange-traded funds and Rydex,which helped pioneer the idea of inverse mutual funds, has launched its own modestseries of inverse and leveraged inverse ETFs that traders can take advantage of.


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Because seeing is believing, and because ProShares is currently the heavyweightchampion when it comes to leveraged and leveraged inverse fund, consider just a few ofthe different types of exchange-traded fund products that the company offer. All of thefollowing benchmark indexes can be traded with Short (straight inverse), UltraShort(leveraged inverse) or Ultra (leveraged long) exchange-traded funds offered by

ProShares:

Nasdaq 100 IndexDow Jones Industrial AverageS&P 500 IndexS&P MidCap 400 IndexS&P SmallCap 600 IndexRussell 2000 Index

UltraShort and Ultra ETFs exchange-traded funds are even more extensive, including:

Russell 2000 Value IndexRussell 2000 Growth IndexDJ U.S. Basic Materials IndexDJ U.S. Consumer Goods IndexDJ U.S. Consumer Services IndexDJ U.S. Financials IndexDJ U.S. Health Care IndexDJ U.S. IndustrialsDJ U.S. Oil & Gas IndexDJ U.S. Real Estate IndexDJ U.S. Semiconductor Index

DJ U.S. Technology IndexDJ U.S. Utilities Index

With regard to short and leveraged short ETFs based on geographic region ProSharesoffers short and leveraged short exchange-traded fund for the MSCI EAFE Index andMSCI Emerging Market Index, as well as UltraShort ETFs for the MSCI Japan Index andthe FTSE/Xinhua China 25 Index.

Again, some of these exchange-traded funds are more liquid than others. This is moreimportant when it comes to short-term trading, where large bid/ask spreads can be at theirmost painful. It pays to watch an exchange-traded fund for a period of time first beforetrading it. This will allow you to get a good sense of the ETFs volatility and averagetrading volume, as well as its responsiveness to your indicators and trading signals.

Adventures in Leveraged ETF Trading

Lets take a look at inverse, leveraged and leveraged inverse exchange traded funds inaction. Thanks to the volatility of the past several months, we have a number ofopportunities to see these high-powered trading vehicles in action.


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The S&P 500 Index topped on a closing basis near 1500 on December 10, 2007. Letssay that three prescient traders all decided to bet against the market at precisely thatmoment. One trader decided to short the S&P 500 Index using the SPY exchange-tradedfund. The second trader decided to buy the Short S&P 500 ETF from ProShares (SH).

And the third trader decided to buy the UltraShort S&P 500 ETF from ProShares (SDS).All three traders held their positions for a calendar month. And all three traders mademoney. Lets see just how well they did.

Trader #1Short SPY on 12/10 at 151.40Cover SPY short on 1/10 at 141.41Gain of 6.59%

Trader #2Buys SH (Short S&P 500 ETF) on 12/10 at 58.76

Sells SH on 1/10 at 62.85Gain of 6.96%

Trader #3Buys SDS (UltraShort S&P 500 ETF) on 12/10 at 50.38Sells SDS on 1/10 at 57.80Gain of 14.73%

While the performance from both Trader #1 and Trader #2 were comparable, Trader #3who used the UltraShort S&P 500 exchange-traded fund more than doubled the returns ofboth Trader #1 who simply shorted the S&P 500 using the SPY ETF, and Trader #2 who

bought a straight, non-leveraged inverse S&P 500 ETF.

These gains can be magnified even further for traders who, in addition to using leveragedETFs, also use margin accounts. It would be easy for a particularly risk-seeking trader tocombine the leverage of the leveraged exchange-traded funds with the leverage of amargin account to produce returns that were double those of the leveraged ETF traderalone or more than quadruple what the trader using non-leveraged ETF was able toachieve.


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Chart of Trader #1: Unleveraged. Short SPY. Gain 6.59%

Chart of Trader #3: Leveraged. Long SDS. Gain 14.73%

Leverage: The Key to Double, Triple or Even Quadruple Profits

Leverage is a double-edged sword, goes the trading clich. The same leveraged ETF thatcan dramatically increase your trading results can mean big losses if traders do not have atried, true and tested short-term trading strategyand the discipline to follow it.Fortunately, there are a number of tools at TradingMarketsfrom PowerRatings andPowerRatings charts to market indicators and trading commentaryto make it easier for


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short-term traders to put a plan of action together and attack the markets with confidenceand purpose.

Exchange-traded fund trading is still a relatively new area. While more investors areturning to low-cost exchange-traded funds as alternatives to costly mutual funds, traders

are just now coming around the idea that exchange-traded funds provide both the short-term liquidity and volatility to make them worthwhile vehicles for short-term trading.

The rise of leveraged and leveraged inverse exchange-traded funds has only served toaccelerate this process, as more and more stock traders are able to take their successfultrading methodologies and apply them to the world of ETF trading with only fewmodifications. With sound trading systems and the proper discipline, ETF trading couldbe the market that makes all the difference to your short-term trading this year.

If you would like to try your hand at trading exchange-traded funds, TradingMarkets canbe a major asset in determining when a given ETF is on sale and when it is overpriced

and ripe for correction. Our Short Term PowerRatings not only provide timelyPowerRatings for all the major ETFs, but because these ratings are updated intraday,short-term traders have the ability to buy the sort of intraday weakness that is acornerstone of buying weakness and selling strength. Click here to try a free 7-day trialto TradingMarkets today, or call us at 1-888-484-8220.

***

DISCLAIMER

The Connors Group, Inc. ("Company") is not an investment advisory service, nor a registered investment advisor or broker-dealer and doesnot purport to tell or suggest which securities or currencies customers should buy or sell for themselves. The analysts and employees oraffiliates of Company may hold positions in the stocks, currencies or industries discussed here. You understand and acknowledge thatthere is a very high degree of risk involved in trading securities and/or currencies. The Company, the authors, the publisher, and all

affiliates of Company assume no responsibility or liability for your trading and investment results. Factual statements on the Company'swebsite, or in its publications, are made as of the date stated and are subject to change without notice.

It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not resultin losses. Past results of any individual trader or trading system published by Company are not indicative of future returns by that trader orsystem, and are not indicative of future returns which be realized by you. In addition, the indicators, strategies, columns, articles and allother features of Company's products (collectively, the "Information") are provided for informational and educational purposes only andshould not be construed as investment advice. Examples presented on Company's website are for educational purposes only. Such set-ups are not solicitations of any order to buy or sell. Accordingly, you should not rely solely on the Information in making any investment.Rather, you should use the Information only as a starting point for doing additional independent research in order to allow you to form yourown opinion regarding investments. You should always check with your licensed financial advisor and tax advisor to determine thesuitability of any investment.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUALPERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING AND MAY NOT BE IMPACTED BYBROKERAGE AND OTHER SLIPPAGE FEES. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTSMAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OFLIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJ ECT TO THE FACT THAT THEY ARE DESIGNEDWITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO

ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.

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Copyright The Connors Group, Inc., 2008.
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