c15 JWBT016-Busby October 9, 2008 9:21 Printer: TBD
150 STRATEGIES TO WIN
The Wave of the Future—ETFs
Another way to trade stocks is to trade mutual funds or use ETFs. ETFs are
not new. They have been around since the late 1980s and early 1990s. How-
ever, in recent years, they have gained much popularity. ETFs are traded
on stock exchanges just like any equity. However, when you buy an ETF,
you are buying a group of investments. In this way they are somewhat sim-
ilar to a mutual fund. Most ETFs are index funds. For example, the Spyder
is an ETF for S&P 500 stocks. The QQQQ is a similar fund holding a Nas-
daq portfolio. The Diamond is the same, but for the Dow Jones 30. These
ETFs are traded on the American Exchange. In addition to the well-known
and popular ETFs, there are many others. I regularly trade OIH, which is
an oil-based ETF.
Trading ETFs offers a number of advantages. First, they are less news
sensitive. If your portfolio is heavy with one particular stock and that cor-
poration has lower-than-expected earnings or their product is defective
and faces a recall, or any number of other bad events befall the corpo-
ration, your portfolio is devastated. With the ETF, the stock is just one of
many, and the effects of a corporation-specific problem are minimized.
By definition, an ETF offers a level of diversity. With an ETF you ac-
quire an interest in a basket of financial products. However, ETFs differ
from mutual funds in that shares may be bought and sold intraday like
stocks. Many ETFs may be electronically traded.
I regularly trade ETFs. In this oil boom, OIH has grabbed my attention.
I use the same strategies to trade ETFs that I use for stocks. That is, I check
liquidity, volume, and beta. In the current market, the OIH fund had been
a great one for me to trade, and at the time of this writing, I trade it sev-
eral times each week. If you are unfamiliar with ETFs, I suggest you begin
educating yourself. These are great profit centers. In fact, I predict that in
the not-too-distant future, mutual funds will be out of favor and everyone
will be trading ETFs instead. They simply offer too many advantages to be
missed.Review
The financial markets offer a wide array of products. During the course of
any day, week, month, or year, there is much that can be traded. Stocks
may be traded intraday, for the long term, or somewhere in between. The
main thing to remember is that you do not want to keep a stock that is not
paying you. Once the profits fall, get out of that particular play.