It’s easy to get lost in the day-to-day bustle of the market sometimes.
You hear me mention certain technical indicators and different jargon often, but sometimes I think it’s helpful to slow things down a little to ensure you’re with me every step of the way.
As you know, one of my favorite things to monitor and trade is ETFs – a.k.a. exchange-traded funds.
My tried-and-true Skittle Charts do just that. To put it plainly, I love ETFs.
Now, this isn’t a discussion geared toward day traders, but that should come as no surprise. I use ETFs on a 4-to-6-week timeline generally, and when you hear me say things like “let the market come to you,” well, this is one of my favorite tools.
So rather than ask you to blindly accept my preferences, I would rather you see why I feel so strongly about ETFs.
The short pitch on ETFs is it’s an easy way to transact business by buying a group of stocks without having to trade mutual funds. But also, it gave the extra bonus of being able to trade something that prices intraday.
Well, we’ve come a long way I first started trading these suckers back in 1998 with SPDR S&P 500 ETF Trust (SPY). Currently, my database tracks more than 6,000.
As you can see, there’s been some explosive growth. And it’s not hard to understand why traders started to gravitate toward ETFs over mutual funds…
They’re easier to understand and the majority are passively managed. In an actively managed market – like mutual funds – you’re at the whim of whoever’s making the choices.
You’ll rarely, if ever, see me trading an actively-managed ETF. There are far too many passive ones for me to open myself up to that type of outside influence.
So, by trading these ETFs, it makes it far easier for me to nail down a group of stocks. But also, it insulates me from headline risk.
Surely you’ve heard me mention this before. Well, by trading a group of stocks rather than individuals, if one of those group is subject to a salacious headline, it can only hurt us so much.
For example, one of my favorite ETFs to trade right now is the SPDR S&P Retail ETF(XRT)…
It’s not hard to see that the current market conditions have put a bit of strain on retailers.
Now, last week, Carvana Co (CVNA) came out and had some good news. With that good news, it managed to send the XRT up along with it.
However, CVNA only makes up roughly 1% of the XRT – its impact can only be so substantial for so long.
That’s the protection that I’m talking about. As long as I’m following my trend with the XRT, I’m going to be just fine.
By dealing with a group of stocks within a given ETF, it makes my technical analysis far more reliable than if I were zeroing in on a single ticker.
So, in all, it makes my research simpler, more consistent, and insulated from headlines.
Now, given the timing of this current lesson, it’s important to give you a little context.
As we go into earnings season, there are a few rules I follow that you’ll want to be aware of when it comes to trading both ETFs and stocks.
First of all, make sure there’s volume behind it.
Any list of ETFs that I show you only features indexes that have enough trading volume to ensure they’re not going to fall victim to wide bid-ask spreads or options that aren’t tradable.
Second, I like to trade ETFs that have a good options market behind them.
As I said before, there are more than 6,000 ETFs in my database right now. You better believe we can eliminate some of those from consideration off of volume alone.
One of the reasons you’re looking at ETFs in the first place is because you want a fluid market, so you want to make sure that the options market behind a given ETF is flue as well.
The third thing that I’ll tell you is to always know your weight.
I like to drill down and say, OK, which indexes – like the Nasdaq 100 – have five or six companies that control most of the movement?
If I have that situation, there’s a lot of headline risk. So, it’s important to know where your headline risk is. In the prior example of XRT, Walmart, and Target are the heaviest weighted, and they’re still under 2% each. That nice, even weight distribution is ideal to avoid volatility.
Now, aside from those points, just like any other ticker or index – watch your levels.
ETFs trade just like any other stock in terms of technicals; the fundamentals are honestly a little easier to read.
So, in a stroke of branding genius, let me give you a quick look of the long and short of the ETF market, as I see it.
On the long side, I’m taking a look at SPDR S&P Homebuilders ETF (XHB), iShares US Home Construction ETF (ITB), SPDR Gold Trust (GLD), iShares Silver Trust (SLV).
On the short side – the SPDR S&P Bank ETF (KBE) and SPDR S&P Regional Banking ETF (KRE) are risk-off right now and likely have some downward movement to come. But I’m also looking at the Consumer Discretionary Select Sector SPDR Fund (XLY) and the aforementioned XRT.
I’m trading those first four with some long-dated puts – I’m talking August or September expirations – to let the trend truly be my friend. This earnings season is going to give a little bit of a wobbly feeling if you don’t.
Outside of that, with the ITB, the XHB, and some of the ones that are to the upside, I’ll actually start to trade some calls or the ETFs themselves in my portfolio.
Alright, I don’t want to overwhelm you, and I’m starting to feel like the professor that reads directly off of the projector slide for an hour straight.
On tomorrow morning’s show, I’m going to show you how to drill down into the weights of given ETFs.
We’ll pick a couple of ETFs and break the down from the top down and start to hit them from the most weighted.
With that info, you’ll be able to really understand the mechanics of what moves an ETF and be on your way to mastering them in your own right.
And with the amount of earnings announcements we’ve got coming down the pike – and the importance of those sectors – there will surely be actions to take.
Talk to you soon.
April 17 2023