Pros and Cons to ETF's, Quantitative Easing and Plays

Just a brief to introduce exchange traded funds to newcomers and experienced alike. If you feel like you can skip to the latter part of this blog. Exchange traded funds have been getting popular recently and are an extremely important factors for traders because of the “cannibalizing” nature of the funds. Let’s brief with their characteristics so you can get a feel for ETF’s:

1.       Lower Costs:  Not actively managed, not as affected by increasing and decreasing fund size from investors buying and selling, and lower expenses with marketing distributions etc.

2.       Flexibility: Bought and sold anytime during the day. Also available for hedging options

3.       Tax Efficiency:  Low turnover of their funds mean that

4.       Market Exposure: Finding the right ETFs gives you the right exposure to what you want

5.       Transparency: Something the Wall Street movies convinces you is important

6.       Returns: Your returns will be more normalized with the market returns unlike holding individual stocks

7.       Still a Stock: ETFs just make a new stock product but is actually very similar to a stock. You need to know how to play the game still and that’s what we are trying to help you with here.

Plays on ETF 2

As you well know, the recent quantitative easing pushed many stocks to a much higher close last Friday. If you believe in its effectiveness, you are a buyer in this market. But for the bears and shorts, you should keep in mind the following:

1.       Banks can hold on to the cash they are basically given. This hugely reduces the monetary policy’s effectiveness

2.       This dilutes the existing dollar’s value and therefore the value of the equity.

Look out for the following (the returns are 1 month returns):

U.S. Sectors
	SPDR Select Industrials (XLI)				12.0%
	SPDR Select Materials (XLB)				11.6%
U.S. Styles
	PowerShares Nasdaq 100 (QQQQ)				12.9%
	SPDR MidCap (MDY)				10.0%

Till next time.