Why Would You Trade ETF's?

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Old Feb 24, 2008, 11:34pm   #1
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Why Would You Trade ETF's?

Hey equities traders.

Why would you trade ETF's?

They have bundled fees.

They don't reflect the true value of the underlying in most cases.

Futures have the IRS Section 60/40 rule and you pay less taxes.

Liquidity is better and spreads tighter in many cases.

Leverage is better.

You can trade them 24 hours when you are stuck in an equity product if you are stuck overnight..

Why?
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Old Feb 24, 2008, 11:38pm   #2
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The ability to basket trade which reduces risk relative to the trading of a single instrument if you know what you are doing.


Paul
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Old Feb 25, 2008, 11:03am   #3
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Hi G.o.T.,
Welcome to T2W.
Your nic' implies that you are very confident in your abilities.

The reasons you offer for trading futures vs ETF's look valid - with the possible exception of the point about spreads and liquidity. Some ETF's have very tight spreads and excellent liquidity. Be that as it may, I think the relative merits of trading individual equities (as opposed to ETF's) vs futures would make for a more interesting debate. I'll put forward some suggestions in support of equities . . .
1. A choice of many thousands as opposed to a relatively small number of futures. Agreed, this can be a disadvantage if you don't know how to find the right instrument(s) from the vast selection available!
2. When the futures are doing nothing other than chopping around sideways in a narrow range, you can always find strong trending stocks - either up or down. Equity traders seldom have to 'sit on their hands' for hours at a time or resort to taking 'boredom trades' with their associated risks.
3. Futures traders don't have any leading indicators. On the other hand, equity traders have the futures! Or, in my case, I keep a constant eye on the Cubes, Spiders and Diamonds. (ETF's have their uses!)
4. I don't know the official stat's, but I'd wager that the vast majority of retail traders and investors opt for simple trading vehicles that they can understand easily. Therefore, most of them trade equities and shy away from futures. I'd much rather have a mickey mouse retail trader on the other side of my trade than a hot shot futures trader from a city institution! In other words, all things being equal, I suspect there are greater opportunities trading equities than there are trading futures.
Just a few ideas . . .
Tim.
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Old Feb 25, 2008, 1:35pm   #4
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I agree with Tims's points and would add
1. that ETFs such as iShares - e.g. FTSE100 - pay dividends.

2. I also hear there are ETFs from the US that are inverse to e.g. the S&P500 or Russell2000performance, so an investor could buy these and see them rise as the S&P falls. Many people feel uncomfortable entering the world of futures or spreadbetting and equally so in shorting an instrument and inverse ETFs allow the to stay heavily exposed even thourgh a bear market where they otherwsie would sit in cash.
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Old Feb 26, 2008, 12:56pm   #5
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Real money funds (i.e. the pension funds) often trade etfs in the short term for liquidity purposes. If for example you have a pension fund that experiences a very substantial inflow from its investors, you want to invest that money as quickly as possible, as from the moment that money is invested, you are exposed to tracking risk of what your fund is actually doing, relative to what it's benchmark is doing. If the relevant benchmark has a high weighting in say UK transportation stocks or whatever, and those go roaring higher from the day you get the cash injection, you really want to be invested there.

So often the big real money managers will quickly get roughly the exposure they need by trading the appropriate ETF, then as time and market conditions dictate, they can swap into the appropriate stocks, also allowing their dealers the breathing space to do what they're paid for, i.e. execute with a light market footprint.

Somethimes that's intra day, sometimes a few days or whatever. Depends on circumstances.

GJ
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Old Feb 26, 2008, 1:54pm   #6
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There's one thing that I didn't see anyone else mention as a reason to play ETFs. That's the ability to make trades on much more specific things than futures can allow - like homebuilding stocks, or water resource companies, or consumer staples, for example.
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Old Feb 26, 2008, 2:33pm   #7
 
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Another reason - take the ER2 - $100 per point or an equivalent of $70,000 worth of stock.

You can buy a few shares of IWM, or the 2X TWM / UWM.

It's much easier to diversify with ETF's, without having a very large exposure to each instrument.

UTB
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