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Personally, I like ETFs. I use them as asset allocation tools, and
occasionally I trade them. The lower volume ETFs are a little tricker
to trade. Most of the time, they should be bought and sold using limit
orders so there is no momentary price distortions caused by lag as the
specialists tries to buy the securities needed to create more shares
of the ETF.
There can also be a large gap between the NAV and the market price of
an ETF. They are not perfectly matched to the market prices of the
underlying securities. The gap is often greater than the expenses of
the ETF and it can be positive or negative. Some ETFs trade more like
closed end mutual funds than they do index funds.
My biggest complaint with ETFs is the lack of shares for shorting.
Only the largest volume ETFs have enough shares in retail accounts
available for shorting. Mutual funds, hedge funds and institutional
traders dry up the shorting market because they use the shares as
hedges. The ability to short sectors quickly and easily without the
uptick rule was one of the big advertising points of ETFs.
In the past when I was trading ETFs more frequently and I wanted to
short many ETFs, I had to call the trading desk of my dealer and have
them borrow the shares from institutional accounts, rather than from
retail accounts. While that works, it also creates slippage issues in
fills. It's a real pain. Most individuals look at the ahares available
for shorting on a website, or call their brokerage and are told there
aren't any shares available for shorting.
There are lots of ETFs coming out every month. Anyone who is
interested can track most of them on www.amex.com select ETFs from
the left column.
In addition to finding out what a new ETF is all about, once they been
on the market for awhile, someone can scroll around on the amex site
and find a list of the shares that comprise any ETF. That creates
other kinds of trading opportunities.
ETFs are quickly replacing basket trading. Many people will buy and
sell ETFs but they would not have created the same opportunities using
basket trading techniques. So from that perspective ETFs are
definitely changing things.
What I was pointing out about the article and the volume issues is
traders need to be aware that ETF buying and selling causes the volume
of both the good and bad performing stocks in the ETF to rise the
same. On the surface this looks like a net zero impact, but it's not.
Essentially as there are more ETFs and as ETF volume rises, traders
will have to change how they look at volume because the volume of
poorly performing stocks are going to rise also because the poorly
performing stocks will be bought as part of the ETF creation. The
volume of poorly performing stocks will be rising while the price is
falling. The degree the price would have fallen due to selling
presures may now be offset by the buying that is necessary to fulfill
ETF demand. Some may consider this a distortion in the demand for
weaker stocks.
Volume today has a completely different meaning than it did 20 years
ago. Many TA volume tools were created 20 years ago. Data suppliers
like Reuters need to supply the actual up and down volume rather than
simply total volume. That would be a good place to start.
Almost all TA tools are based on price and volume. There is only so
many ways to analyze price and volume. The information which can be
extracted from price and volume is limited. As volume becomes more
difficult to discern the usefulness of it may decline meaning that
most information will have to be extracted from price alone.
The question is without rational gaps in the efficient market, or the
creation of distorted gaps that are hard to read, how much opportunity
will there be for in the future for individuals to profit from the
efficiency gaps?
If these gaps close, then the market has reached random walk
territory. Most of the academic studies do not include data on the
current market. Often the studies are dated to the 1980's and 1990's.
ETFs weren't around then.
Ten years from now, what will the new academic studies say? Financial
engineering is creating new products faster than individuals can learn
to use them and faster than academics can measure their impact on the
markets.
It's not that traders need new TA tools. There are thousands of TA
tools and the vast majority have little or no value. Traders need
differentiatable data to apply the tools to, or create tools that use
the data effectively. On most services right now traders get to
download high, low, open and close price and total volume by bar.
Is that going to be enough to make TA useful in the future, or will
the change in product and the expansion of the fund industry and
institutional buying and selling diminish the value of the tools?
Will traders have to focus on the shares of companies that are off the
ETF, fund and institutional radar? How many companies will that be as
ETFs expand to cover every kind of basket someone can think of?
--- In equismetastock@xxxxxxxxxxxxxxx, "jawjahtek" <jawjahtek@xxx> wrote:
>
> super,
>
> I agree that too many ETFs are being created and that narrow sector
> ETFs can distort some market sectors.
> However, I cannot tell from your post if you are against all ETFs
> and/or if you are a supporter of Random Walk theory.
> ETFs in market segments with significant market cap have little
> impact compared to institutions and hedge funds.
> And even the most ardent academic supporter of Random Walk thoery
> agrees that the original version of the theory is wrong.
> My take from the article cited below in that some ETFs in narrow
> market sectors are distorting volume as an indicator.
> But institutions and hedge funds have been causing the same
> distortions for years; why point out ETF impacts without mentioning
> the impacts of institutions and hedge funds.
> I'm sorry if this appears to be a rant; for some reason CNBC and some
> commentators have been ranting about ETFs during the latest market
> downturn even though ETFs had absolutely no impact on the computer
> glitch in the Dow.
>
> Ross
>
>
> --- In equismetastock@xxxxxxxxxxxxxxx, superfragalist <no_reply@>
> wrote:
> >
> > Anyone trading small caps might be interested in an article in
> today's
> > Wall Street Journal 3/9/2007 which discusses how ETF trading is
> > distorting volume and may hurt volume as a technical indicator.
> >
> > The article is in the Money Section. ETFs Build Presence in Shares
> >
> > http://users2.wsj.com/lmda/do/checkLogin?mg=wsj-users2&url=http%3A%
> 2F%2Fonline.wsj.com%2Farticle%2FSB117340540305631813.html%3Fmod%
> 3Dtodays_us_nonsub_money_and_investing
> >
> > Most people do not understand ETF volume, the impact ETF volume has
> on
> > individual share volume or individual share prices. They think ETFs
> > are priced on supply and demand and that ETF volume works the same
> as
> > the volume of ordinary stocks. In addition, there are differences in
> > how mark to market pricing is done on the trading exchanges.
> >
> > Vomund explains some of this in his book ETF Trading Strategies
> Revealed
> >
> > There are also articles that explain bits and pieces on the
> internet.
> >
> > Specialized, or sector ETFs, are having the same impact on stock
> > volume totals in individual shares in a sector or in a specialized
> > area like socially responsible stocks. As the specialized ETFs grow
> in
> > popularity so will their ability to distort the meaning of share
> > volume and share pricing.
> >
> > When an ETF fails to achieve enough trading volume to cover its
> costs,
> > the sponsor will liquidate it and cause the opposite volume issues
> to
> > the downside.
> >
> > All this will provide more support for Random Walk.
> >
>
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