ETF Update: Trading Strategies, Unpopular Bond ETFs, Platinum ETN, New All-World ETF,

by: Tom Lydon posted on: April 07, 2008 | about stocks: BSV / BWX / GWO / PMY / SHY / TIP

Font Size:
Print
Email

Trading Strategies

When it comes to trading your ETFs are you a mechanical type, or a discretionary?

A discretionary trader uses experience and judgments to make trading decisions, with a documented trading plan set with rules to guide or bind their decisions. When it comes time to put the plan into action, they will not only use intuition for the final decision, they also use knowledge of current market conditions.

Rob Davenport for Trading Markets says a mechanical trader is one who has precise rules that dictate every trade they make. They do not care about anything going on in the market, unless it is part of their rules base. A systematic trader takes every trade and pays no mind to intuition, judgment or experience.

Our strategy is to stick to our plan, and not let emotions get involved, much like a systematic trader. As Davenport says, emotions can be a demon when it comes to your trading. It can be just about impossible to eliminate them, but neutralizing them will serve any trader well.

New Bond ETFs Less Popular

Bond ETFs, known for their defensive or conservative strategies, are starting to feel the impact of the lopsided market. Credit quality, inflation and the uncertain economy are starting to affect the usually even-keel bond market. ETFs such as the iShares Lehman TIPS Bond ETF (TIP) provide a low-cost and efficient way to buy and sell bonds.

But one expert says market volatility is creating dislocations in the fixed-income segment. Investors are flocking to the bigger, more established funds instead of the newer ones. They're also showing particular interest in the less risky types, such as those that don't contain mortgage securities or junk bonds.

Michael A. Pollock for The Wall Street Journal reports that bond ETFs typically contain a sample representative of the bonds within the index - an index could have thousands of members, but the fund may only have 100 of those holdings.

There are many bond ETFs available. A few of them are:

iShares Lehman 1-3 Year Treasury Bond (SHY)
Vaguard Short Term Bond (BSV)
SPDR Lehman International Treasury Bond (BWX)

Platinum ETN

Investors who have been looking for access to platinum and palladium via an exchange traded product finally can have it with the ELEMENTS MLCX Precious Metals Index (PMY) ETN, listed on NYSE Euronext.

The fund follows the MLCX Precious Metals Index, which provides a benchmark for the precious metals sector, including gold, silver, platinum and palladium. Platinum and its rising price, in particular, have generated much interest among investors. For reasons of liquidity, it's unlikely the United States will have an exchange traded fund (ETF) that would hold futures for the rare metal. It's in such short supply that the potential is there for investors to dictate and control the market, says Kevin Rich, CEO of DB Commodity Services.

ELEMENTS has also listed the ELEMENTS Credit Suisse Global Warming Index ETN (GWO), which offers exposure to the stocks of companies that have increased focus on products and services related to easing the effects of global warming.

ETFs and ETNs are cousins, but they operate in different ways: ETNs are debt securities with a stated maturity date. With them, an investor is assuming market risk along with the risk that the ETN's issuer might not be able to pay up when the time comes.

These ETNs join a growing list of exchange traded products that offer exposure to commodities and target the "green" sector, including:

First Trust NASDAQ Clean Edge (QCLN)
PowerShares Cleantech Portfolio (PZD)
Market Vectors Environmental Services (EVX)
streetTRACKS Gold Shares (GLD)
iShares Silver Trust (SLV)

iShares New All-World ETF

On the heels of iShares' new all-world ETF, Vanguard is trying to enter the fray with its own similar kind of fund.

They've registered with the SEC for the Vanguard Global Stock Index Fund, which would offer three share classes: investor shares, institutional shares and ETF shares. It's anticipated to launch in the second quarter of 2008.

The fund aims to track the FTSE All-World Index, a market-cap weighted index of large- and mid-cap global stocks in 48 countries. About 55% of the index will be made up of stocks outside the United States.

Vanguard's new fund will join the iShares MSCI ACWI Index Fund (ACWI) as the first two true all-world ETFs. The country breakdown for the iShares fund has the as its top five countries the United States, 41.8%; the United Kingdom, 9.6%; Japan, 8.6%; France, 4.7%; Germany, 4.1%.

Across the sectors, it's most heavily weighted in financials at 22.5%. Energy is 11.7% and Industrials are 11.2%. Exxon Mobil (XOM) is the largest constituent, representing 1.6% of the holdings. General Electric (GE) is 1.2%.

It'll be interesting to compare the two funds side-by-side once Vanguard's is up and running.