EQUITIES:

LESSON FOUR
Utilizing, Understanding, & Monitoring ETF’s

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TERMS TO
KNOW:

• ETF’s – Exchange traded fund that is primarily composed of a basket of

stocks
• ETN’s – Exchange traded note, less prominent and more typical in
structured credit/product markets
• Leveraged ETF’s – Semi-actively managed products that are usually
rebalanced daily and attempt to replicate the reference entities
performance by a set multiple
• Types of ETF’s – Commodity, Bond, Currency, Sector, and Index
• Why ETF’s exist – “Easier Diversification”
• Spread Trade – Long and short related positions. An example is Long
SPY and Short DIA. Expecting the S&P to outperform the DJIA
percentage wise.
• Basic Statistical Arbitrage – Not really “arbitrage”, but the theory that
two products tend to converge and diverge respective of one another.
• Alpha – A measure of value added to a portfolio by the outperformance
of an index.

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UTILIZING Want to perform close to beta?
ETF’S Buy or Sell the Index ETF’s:
SPY, QQQQ, DIA, and IWM

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MONITORING Relative Sector Strength within a
ETF’S Particular Sector

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SPREAD TRADES: ARE NOT
LESS RISKY THAN
NORMAL INVESTMENTS

Sector vs. Sector

Sector vs. Index
Sector vs. Stock

Short MOO , Long MON

Warning both legs of the trade can go
against you.

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SIMULATION 1 Intraday Spread Trade across SPDR’s
You can only trade SPDR’s: XLY, XLP,
XLE, XLF, XLV, XLI, XLB, XLK, XLU

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KEY POINTS Don’t worry about leveraged ETF’s at
FROM this point
SIMULATION 1

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VISUALIZATION • A stock goes against you and touches
EXERCISE your plan price, you need to get out
• Imaging hitting sell right away.
• Or in the case of being short, covering.

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SECOND Weak ETF’s vs. a strong index
SIMULATION “Finding the laggards”

7/6/2010

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KEY POINTS You can diversify amongst ETF’s,
SIMULATION 2 there is a lot of ways to trade this

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RANDOM You can only use one ETF
SIMULATION Long or short create Alpha or stick
with Beta

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ANALYSIS, • What were the best plays?
COMMENTS,
QUESTIONS?

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WHAT TO
LOOK OUT
FOR THIS
WEEK:

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