Here at The FRED Report ( www.thefredreport.com), we analyze ETFs (Exchange Traded Funds) rather than indices, and in recent days, some of our clients have asked us why we do this. The reason is that ETFs are actually traded, while Indices simply measure. Another benefit is that we are independent unlike some of the NYSE firms that do not allow research analysts to comment on ETFs for compliance reasons. Two areas of Technical Market Analysis where Index vs. ETF analysis becomes important are gaps and volume. First, we will examine gaps. GAPS Let's look at some charts of ETFs vs. their respective indices. Below, we show the SPDR S&P 500 ETF (SPY), an ETF that mimics the performance of the S&P 500, and the S&P 500 Index (SPX.X). Notice that the SPY had a gap open two days ago, while the SPX did not. The reason for this is that most quote systems simply use yesterday's CLOSE as today's OPEN. From a technical analysis perspective, analyzing the index can create distortion. The index is showing trades occurred in an area where in fact no actual market trading took place. This is also apparent when looking at the Mid Cap and Small Cap indices vs. the most active ETFs measuring those indices. We show charts of the S&P 400 Mid Cap (^MID) vs. the MidCap SPDR Trust (MDY), and the S&P 600 Small Cap (^SML) vs. the iShares SP Small Cap 600 (IJR). This is even clearer on the S&P 100 Index (^OEX) and the iShares S&P 100 Index ETF (OEF). There are two instances I will point out. The first is the downside gap on June 28, 29, and the second is the upside gap on July 12, 13. Can this also happen in Sectors? You bet! Let's look at the AMEX Oil Index (XOI) vs. the Energy Select Sector SPDR (XLE). There are many examples, but the most graphic one is the volatility experienced around the trading of May 7 and May 10. Note the gap on the XLE, and the lack of such a gap on the XOI.