This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Can't Use Rearview Mirror on ETFs

This column was originally published on RealMoney on Sept. 28 at 4:00 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.

Exchange-traded funds are different from typical index funds and much different from actively managed open-end funds. ETFs are index funds that trade throughout the day like a stock, while OEFs price once a day after the stock market closes. One more important difference: ETFs are very new, which means that many do-it-yourselfers do not know much about them and many investment professionals and market-related Web sites still are learning how to analyze them properly.

While I may or may not know the best way to analyze ETFs, I sure do know a bad way to analyze them: to look at ETFs as if they were OEFs. An investor who wants to buy an actively managed OEF may find that there's not much to analyze, because that investor is really buying the manager's past performance on faith that that past performance can be maintained. Some bets, like Bill Miller, are better than others. Obviously, there's more to fund selection than this, but ultimately, it comes down to a belief in the manager.

Analyze This Differently

Faith in a manager plays no role in picking an exchange-traded fund. In most cases, ETF selection boils down to forward-looking analysis of a given sector, country, style, capitalization size and so on. ETF selection also involves selecting the best product to capture a given effect.

For example, on the basis of a forward-looking analysis of supply and demand, economic conditions or technical analysis, an investor could decide to overweight or underweight the tech sector and buy the appropriate amount of a tech ETF to capture what that investor believes will produce the desired effect. After deciding that being overweight tech makes sense right now, an investor might then analyze the various tech ETFs available and decide that the Technology Sector SPDR (XLK) is the best choice to trade. This could be applied to both long-term investors and short-term traders.

1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Jim Cramer and Stephanie Link reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

Jim Cramer's protégé, David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
Try it NOW
Try it NOW
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

Jim Cramer's protégé, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,164.95 -251.90 -1.45%
S&P 500 1,994.99 -26.26 -1.30%
NASDAQ 4,635.24 -48.1670 -1.03%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs