Winning with ETFs

Winning with ETFsHi everybody, Bill Poulos here. I’m an expert in Exchange Traded Funds (ETFs) and want to give you some valuable—and profitable—insights that you can use right away.

ETFs have really grown in popularity over the last several years.  They will soon surpass mutual fund money and for a lot of good reasons.  They trade like stocks, are highly liquid, have low expenses ratios and give instant diversification across almost every asset class you can think of.  You can also be long or short in the market with ETFs and gain extra leverage by optioning them.
In the US alone there are over 1,000 ETFs; but not all of these are tradable and most of them are downright hazardous and should be avoided.  That said, if you know which ETFs to trade, then you have the opportunity to do very, very well. It actually isn’t that difficult once you know the secret as to which ones are suitable for trading and which ones are not.The United States is the most mature ETF market, but less mature ETF markets are developing in the UK, Australia, and Canada, and are growing quickly. The main point –and a very important one—that I want to talk to you about today is that are not all ETFs are created equal.

“Deliberately trading” and Gaps

Winning with ETFs

I use the term “deliberately trading” to describe the kind of market action that we want to see in ETFs before we consider trading them. But before I do that, I want to give you some examples of ETFs that are not trading deliberately. One would be BSCD, Guggenheim Bullet Shares.

If you look at that chart, you’ll see that it looks like an electrocardiogram where the price just jumps all about, day after day after day in a zigzag fashion. It really does not go anywhere. Yes, it is a bond fund, but it is one that you don’t want to trade.

Another one is CEP, Constellation Energy Partners.

Winning with ETFs

 

That one does have some trending going on, but if you look closely, you will see some extremely wide range days, especially at the end of February. That’s not the kind of ETF you want to trade, because if you can get a very, very wide range day like they did at the end of February, that means you can get that at any time without warning, and that spells risk. So this is a market that is not trading deliberately. Any market that exhibits these unusually wide range days are ones you want to avoid.

Winning with ETFs

 

Let’s look at another one. Check out GBF. Now this one is the Ishares Barclays Government Bond Fund. It’s another bond fund. It’s fairly flat, but even so, if you look back in time toward the end of September, you will see a very crazy wide range day. With no explanation, you see another one in early to mid-October. You also see a lot of gaps in the price from day to day. It’s not going anywhere. So you have non-deliberate behavior and you have a price trend that is basically flat. So why trade this ETF?

Let’s look at one more. See RWW, Revenue Shares Financial Sector. This one has a nice uptrend, but look at what is going on there. Look at the gaps from day to day. You have hardly any trading going on. Some days there is very low volume in this ETF.

Also watch for gaps in prices. A gap means that the low of today is higher than the high of yesterday. Whenever you see gaps in prices, especially a lot of them, stay away from that kind of ETF for trading purposes, because gaps spell higher risk. These can occur without warning and blow right on through your stops, regardless of the method you are using. So you don’t want to trade any of these ETFs that exhibit unusually wide range days, gaps, or a helter-skelter kind of pattern that looks like an electrocardiogram. Those all spell high risk. Those tend to be the ETFs that are lower volume, but not always. You can have some high volume ETFs that are not trading deliberately and you want to stay away from them, too.

Now let’s look at one that is quite suitable to trade, and one that I think offers a great deal of opportunity right now.

Winning with ETFs

 

This is UYG, the Pro Shares Ultra Financials ETF. If you look at this chart, you can see that this ETF for the most part has been trading deliberately for at least the last six months. You will see a few price gaps, but not many. You don’t really see any unusually wide range bars, either. You also have a nicely trending market, up or down. It doesn’t always have to be going up, but even back in October, it was moving up nicely, then it moved down nicely, moved back up a little, corrected, and then it was on a nice upward trend for the last three or four months. Now this is a deliberately trading market. This is the kind of ETF you want to be trading in and can make money in.

Out of the over 1,000 ETFs in the US today, less than 100 of those are trading deliberately enough like UYG to be considered tradable vehicles. I say that because your first goal has to be to manage risk. So only trade those that trade the most deliberately to minimize risk. This UYG is just such an ETF. You can see the dramatic increase since late October up over 60 percent, in just a few months.

Now you might think “that’s great, but I missed that run.”

Not necessarily. Right now, ETFs sold off in the recent market sell-off, right into the 50 day moving average, which should provide strong support. In the US banking sector, you have the opportunity to generate nice profits in the next several quarters, as the long term interest rates rise and the Fed continues to keep the short rates low. That spells profits for banks.

That’s exactly what Warren Buffett saw when he took a huge stake in Bank of America last fall. Today, his investment is already paying off. And there is a lot more to come, with a good opportunity to buy UYG today. Of course, depending on your trading style, if you are a short term trader, you will want to have some fairly tight stops, probably below the recent lows. If you are more of a position trader, you might want to give it a little bit more room. It depends on your trading style.

So there is a lot of opportunity in these ETFs. You have to know which to trade–those that are trading deliberately. They tend to be the ones without the unusually wide range of bars, lots of gaps, or helter-skelter pattern.  Remember, you want deliberately trading, higher volume ETFs; they mean profitable trades and money in your pocket.

Profitable trading,

Bill Poulus

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