ETF's

What exactly is an ETF. ETF stands for exchange traded fund. ETF's consist of a basket of stocks much like the Dow 30, Nasdaq 100, or S & P 500. ETF's have been put together to mirror index like activity in the stocks that comprise it.

ETF's function much like mutual funds in that they consist of stocks in indexes,industries, or sectors of industries. The beauty of these financial products is they can provide you exposure to areas of concentrated risk in a sector or industry over a number of different stocks rather than just one or two. It allows you to enjoy the benefts of a rising or falling market yet in general reduces the overall risk of exposure to an individual security.

ETF's provide some advantages over mutual funds in that they generally have lower expense ratio's than most mutual funds. They are more passively managed which reduces costs and they can be sold during the day which you cannot do with your mutual fund. All mutual fund sales are transacted at the end of the business day and can affect adversely the value of your investment if you are trying to trade it during the day. ETF's can also be sold short which you cannot do with your mutual fund. In other word's a mutual fund constantly exposes you the long side of the market even in a declining market. With an ETF you can sell it short if you think the market or sector that ETF represents is going to decline in price and it can be purchased using margin.

They are a great way to diversify and enjoy the benefits of ownership such as price appreciation and dividend capture.

There are hundred and hundreds of ETF's currently and many more coming out each week as the companies that issue them realize the value they bring to investors and their own companies. Their ease of use makes them a perfect vehicle for the investor, swing trader, or speculator.

There are also many ETF's that have been folded and no longer trade due to lack of participation by people in the markets. Many are thinly traded and are holding on attempting to create market presence for themselves. If volume and participation does not pick up then many of these will also fail.

With this in mind we prefer to trade ETF's that have been established in the marketplace for a while and have trading volume that proves their value for the investor and trader. Thinly traded stocks and ETF's can sometimes make getting the price you want more challenging on either the buy or sell side.

We prefer to at least see 100.000 shares traded a day on a regular basis before we trade an issue. Again the reason is convenience and liquidity. Savvy traders can make great money in thinly traded issues but that same liquidity can come back and bite them when they need to enter or exit in a timely fashion.

Commodity ETF's are one style of ETF that can build big volume for an issue when prices start to rise or fall rapidly. Gold, Silver and Oil are three examples of commodities that have seen large increases in share activity over the last year or two. When volume starts to build they become very liquid and easy to trade. The aforementioned commodities are very popular with traders and make it easier to find traders willing to buy your position or sell you one.