With the vast number of public companies that exist in our market, it can sometimes be tricky when deciding which stock, or stocks, should be the focus of your hard-earned money.
Dividing your attention among a wide range of individual stocks can be challenging -- that is, if you have a full-time job like most of us do. There often isn't enough time to do the fundamental analysis on them.
That's why exchange-traded funds are a great alternative for individual investors. They are securities that trade just like stocks. ETFs aren't shares of a company, though. Instead, they track different indices or select groups of stocks. Some ETFs track other assets, such as commodities, making it relatively easy for investors to make bets that traditionally have required access to the futures markets.
One very popular ETF is the SPDR S&P 500 ETF Trust (SPY) , which tracks the S&P 500 index. Investing in an ETF like this is a great way to gain exposure to large-cap U.S. stocks. It offers investors simple diversification within this asset class. If you instead buy just a couple of large-cap stocks that suddenly suffer fundamental problems, you'll lose capital. Owning this ETF means that the winning stocks offset those losers.
Those are just some of the reasons individual investors might find ETFs useful.
But one of the main reasons a large firm like ours would be attracted to ETFs is their volatility. Certain ETFs are double- or triple-leveraged representations of their indices. This means that on a daily basis, the price of these ETFs doubles or triples that of the indices they track. (Individual investors saving for retirement should probably stay away from these ETFs, though, because the volatility that makes them useful for experienced traders makes them inherently riskier for individual investors.)
Another reason large firms might be attracted to ETFs is their volume. Many ETFs have very large trading volumes. That makes it easy for us to enter and exit these securities with ease while capturing large and volatile moves. This volume also makes it easier for individual investors to get into and out of ETFs when they need to.
ETFs are traded exactly like stocks, with specific ticker symbols and no additional rules or regulations. Are the underlying technicals of your stock not looking so hot, but its industry ETF is in a strong uptrend? Switch out. That is a clear signal that your stock is a laggard in an otherwise strong industry. Whatever strategy you currently use for stocks can be applied to ETFs. Just keep in mind that ETFs have no profit & loss statements and no quarterly earnings statements.
Recently, the current market enabled our firm to capitalize on ETFs such as ProShares Trust Ultra VIX Short Term Futures ETF (UVXY) , Direxion Shares Exchange Traded Fund Trust (JNUG) and VelocityShares 3X Long Natural Gas ETN (UGAZ) .
ProShares Trust Ultra VIX Short Term Futures ETF is a double-leveraged index that tracks short-term volatility with a recent daily volume of 62 million and double the price volatility.
The Direxion Shares Exchange Traded Fund Trust is a triple-leveraged bullish ETF that tracks the performance of the junior mining index, but with triple the price volatility.
VelocityShares 3X Long Natural Gas ETN is a triple-leveraged fund that tracks the behavior of the natural gas commodity.
Technical analysis can be applied to each index similarly to the way in which it's applied to normal stocks.
Our interest in these specific ETFs developed primarily due to their sudden increased in relative volume. By overlaying each of their long-term technical conditions with their intraday setups we were able to realize large gains by trading thousands of shares in just a matter of minutes. Although individual investors saving for retirement should avoid strategies like this, experienced individual daytraders might consider them.