The Exchange Traded Funds (ETF) Explosion

by | Feb 11, 2007 | Asset Management

ETF’s are exploding, there are dozens being created every month.

You can own an ETF that:
-Owns every stock in a sector, or
-Owns every stock in an index (like the Dow Jones, or the S&P Small Cap 600); or
-That’s leveraged (called an “ultra” basket), where you get 150% or 200% of the move in a sector.
-Sells short an entire sector (called an “inverse” basket).

There are also ETF’s that are leveraged short baskets (leveraged stocks sold short).  If you think a sector will decline, you can really put your money where your mouth is.

Look, this gives us a TON of tools at our disposal — no matter what the current market conditions.

Here’s why this matters:

80% of the price move in a stock is directly attributed to the current conditions in the sector and the market overall.

Meaning only 20% of a stock’s price change is from the fundamentals.

This was from a book written in 1964, titled The Latent Statistical Structure of Securities Price Changes by Benjamin F. King.

But wait — people spend 80% of their time (or more!) evaluating fundamentals — and spend only 20% (or less) of our time on sector and market evaluation.

So, if 80% of the move in a stock is determined by:
-Whether the market is on offense, and by
-Identifying which sectors are in favor (or out of favor)

Well, if we had tools that could let us buy (or short) an entire
sector, we would probably have better performance.

And now we do have these tools.
They’re called Exchange Traded Funds, or ETF’s.

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