Exchange Traded Funds
Stockscores.com Perspectives for the week ending January 27, 2006
In this week's issue:
Not all investors and traders are comfortable with playing individual stocks. When you trade one stock at a time you have an added risk to abnormal events that may affect that stock and cause a significant change in price on this unexpected news. That is why people diversify but diversification is not as easy when you have a smaller capital base. That is why some people like to buy mutual funds. However, there are problems with mutual funds as well. You can not trade in and out of them as easily as you can with a stock and many carry high management fees that eat in to their performance.
This leads one to wish for a mutual fund that has low fees but trades like a stock so that we can move in and out of it as we see buying and selling opportunities. Fortunately, that wish is easily answered with Exchange Traded Funds, or ETFs. You can buy and sell these instruments just like a stock but they are comprised of a basket of stocks that provide the diversification that reduces risk. Want to buy the Japanese stock market? You can, the symbol is EWJ. If you think Brazil is a hot place to be, take a look at EWZ. Like the Canadian Gold sector? You can trade that too with the T.XGD ETF.
ETFs are becoming very popular with individual investors because they take the benefits of mutual funds but compensate for their weaknesses. Since very few mutual funds consistently beat the overall stock market, why not take some control of your investments by trying to pick the winning ETFs of tomorrow.
These instruments trade on the Canadian and US markets. Here are lists of the most active ETFs for each country:
Canada
T.XIU - iunits s&p/tse 60 part
T.XEG - iunits s&p/tse cdn enrgy
T.XGD - iunits s&p/tse cdn gold
T.XIN - iunits msci int'l equity
T.XSP - iunits s&p 500 index rsp
T.XFN - iunits s&p/tse cdn finls
T.XBB - iunits canadian bond broad market index fund
T.XIT - iunits s&p/tse cdn it fd
T.XMD - iunits s&p/tse cdn midcp
T.XRE - iunits s&p/tse cdn reit
T.XIC - iunits can eq index fd
T.TTF - td s&p/tsx comp index fd
T.TCF - td tse 300 capped index
T.HCH - canadian pacific holdrs
US
SPY - standard & poors dep rec
SMH - semiconductor hldrs tr
IWM - ishares tr russell 2000
XLE - spdr energy sector
XLF - spdr financial sector
OIH - oil service holdrs tr
DIA - diamonds trust
XLK - spdr technology sectr
XLB - spdr materials sel sect
EFA - ishares tr msci eafe
RTH - retail holdrs trust
XLU - spdr utilities select
XLP - spdr cnsmr stpls sector
EEM - ishares msci emrg mk inc
XLV - spdr select sect health
MDY - standard&poors mdcp spdr
XLI - spdr indstrl sector
IWO - ishares russell 2000 gr
IBB - ishares tr nasdaq biotec
PPH - pharmaceutical hldrs tr
EWC - ishares canada index fd
RKH - regional bank holdrs tr
IWN - ishares russell 2000 vl
EWW - ishares mexico index fd
XLY - spdr cnsmr discr sel sec
ILF - ishares s&p latam 40 ndx
IWF - ishares russell 1000 gr
TLT - ishares tr lehman 20+ yr
EWG - ishares germany index
EWA - ishares austrl index fd
IWD - ishares russell 1000 val
BBH - biotech holders trust
VWO - vanguard emerging market
PBW - powershares etf clean en
AGG - ishares lehman us aggr
EPP - ishares msci pac xjapan
IWB - ishares tr russell 1000
ICF - ishares tr cohen&steers
HHH - merr lyn internet hldrs
IGW - ishares tr gs semicondct
EWO - ishares austria index fd
UTH - utilities holdrs trust
SHY - ishares tr lehman 1-3 yr
IGN - ishares tr gs mltmd ntwk
VTI - vanguard ttl stk mk indx
RSP - rydex etf tr rydex s&p
VNQ - vanguard reit vipers
OEF - ishares s&p 100 index fund
IAU - ishares comex gold trust
IWS - ishares tr rssll mcap vl
SWH - software holdrs tr 2040
IWR - ishares tr rssll mcap in
PGJ - powershares etf gldn dra
BDH - broadband hldrs merr lyn
IWV - ishares tr russell 3000
ITF - ishares tr s&p topix 150
IEF - ishares tr lehman 7-10yr
TTH - telecom holdrs trust
BHH - b2b internet holdrs tr
VGK - vanguard european vipers
EZU - ishares msci emu index
IGV - ishares tr gs sftwr indx
IIH - internet infrst hldrs tr
IAH - internet archtr hldrs tr
WMH - wireless hldrs tr 2040
EKH - europe 2001 holdrs trust
MKH - market tr 2000+holdrs tr
ETFs are great because you can trade a sector or an entire country just as if it was an individual stock. For example, here is one year chart of the Canadian Energy iUnits, trading with the symbol T.XEG.
Applying the Stockscores 3 Rules for entering a trade, there was a buy signal in the first week of June when the ETF broke had a Sentiment Stockscore of greater than 60 and a Signal Stockscore of greater than 80 and was breaking out from a good chart pattern.
This was at around $63 and was the start of a four month up trend in the Energy sector. A sell signal came early in October when the ETF broke down from a falling top pattern at am approximate price of $77. This sector went sideways for the next three months until breaking out again recently, again with good Stockscores.
If you were trading individual oil stocks through this time you may have been frustrated by some that failed to keep up with the overall market because of company specific bad news. By buying a basket of stocks through the ETF you had a lower risk way to trade the sector.
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So, how can you use Stockscores to identify opportunities in the ETF market? Here is what I suggest:
Assuming you have registered as a Stockscores user, log in to the site and go to the Watchlist Creator tool. This tool is free to use but you have to be a registered user.
Create a Watchlist called ETFs using the symbols above. I created separate Watchlists for the Canadian and American ETFs.
On a daily or weekly basis, use the Slideshow or Gallery Chart Viewer to scan through the charts of the ETFs in search of good Stockscores and good chart patterns. If you see something that is approaching a breakout point, use the Stock Alerts tool to advise you by email when the breakout occurs.
This process is made simpler if you are an Advanced Member of Stockscores because you can use the Market Scan tool to filter through the Watchlist in search of those ETFs that have good Stockscores. Use the Market Scan to search your Watchlist for those with a Sentiment Stockscore of 60 or higher and a Signal Stockscore of 80 or higher.
When you take a position in an ETF, use the Portfolio Creator tool to track that position and the Stock Alerts tool to advise if your position is approaching support so you can cut it loose if the pick turns out to be wrong. Remember, you can not be right all of the time and you must take a small loss when the market proves the choice wrong.
I applied the Stockscores Approach to the ETF Watchlists that I created and found the following ETFs which I think have good potential.
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1. SWH
The Software sector broke out through long term resistance three weeks ago but then found selling pressure that pulled these stocks back to support. This week brought a recovery of those pull back losses and the sector is again pushing toward its highs. Long term optimism and a strong January are good indications that this sector ends 2006 higher.
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2. DIA
The Dow has been testing resistance at just under the 11,000 mark for some time and continues to build a base right below that big psychological barrier. With long term rising bottoms it appears that investors are optimistic about the potential of the large cap stocks, I think we will get a breakout soon. It may take a few weeks but keep a close eye on the DIA for that break.
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3. VNQ
This REIT ETF is pretty young but is making a break to all time highs with really strong volume this week. This sector is attracting a crowd and that is often the best indication of future expectations.
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References
Get the Stockscore on any of over 20,000 North American stocks.
Background on the theories used by Stockscores.
Strategies that can help you find new opportunities.
Scan the market using extensive filter criteria.
Build a portfolio of stocks and view a slide show of their charts.
See which sectors are leading the market, and their components.
Disclaimer
This is not an investment advisory, and should not be used to make
investment decisions. Information in Stockscores Perspectives is often
opinionated and should be considered for information purposes only. No
stock exchange anywhere has approved or disapproved of the information
contained herein. There is no express or implied solicitation to buy or
sell securities. The writers and editors of Perspectives may have positions
in the stocks discussed above and may trade in the stocks mentioned. Don't
consider buying or selling any stock without conducting your own due diligence.
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