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    Top 5 Technical Indicators for ETF Trading: Illustrated by Examples
    Top 5 Technical Indicators for ETF Trading: Illustrated by Examples
    Top 5 Technical Indicators for ETF Trading: Illustrated by Examples
    Ebook147 pages1 hour

    Top 5 Technical Indicators for ETF Trading: Illustrated by Examples

    By Jing Zhang and Anthony E. Hu

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    About this ebook

    Technical analysis and fundamental analysis comprise two categories with which to analyze securities and investment decision-making. Technical analysis is an imperative device for investors and traders who want to beat the general market. Technical analysis is focused on market movement, momentum, trending, and potential reversal. To execute technical analysis usually involves complex mathematics and statistics that are the hinges of the scheme of technical indicators. This eBook allows you to adopt technical analysis without mastering the formula. Instead, the readers can concentrate on interpreting the market warnings or signals to achieve their investment goals.
    If you want to become a winner in the stock market, you must discern and gauge the forces that drive stock market movement and momentum. In this eBook, the authors outline the top five technical indicators which are employed by investors, and are able to effectively detect the market reversals, including Relative Strength Index (RSI), ISE Sentiment Index (ISEE), Volatility Index (VIX), Traders Index (TRIN), and Smart Money Flow Index (SMFI). Appropriately Incorporating the above five technical indicators with fundamental analysis appropriately will smooth your investing journey.
    This eBook also covers the basics of ETFs, ETF trading, and the general stock market. Authors will share with you where to open brokerage accounts with low cost. Traders can even enjoy free trades regularly if their portfolio meets certain criteria.
    Accompanying the explanations and mechanisms of each of the above five technical indicators, the authors use case studies, examples, charts, and figures to better illustrate how to utilize those indicators in your trading.
    LanguageEnglish
    PublisherBookBaby
    Release dateSep 6, 2013
    ISBN9781628474183
    Top 5 Technical Indicators for ETF Trading: Illustrated by Examples
    Author

    Jing Zhang

    Jing Zhang is an associate professor of mechanical and energy engineering at Indiana University - Purdue University Indianapolis, USA. His recent research interests include (1) developing new extrusion based novel AM processes for metallic and ceramic materials, (2) understanding the process-property-performance relationship in AM components, and (3) developing multi-scale multi-physics AM process models. Dr. Zhang is the editor-in-chief of International Journal of Additive Manufacturing (Taylor & Francis Group). He is also the co-chair of the AMSC Post-Processing Working Group, formed by America Makes & ANSI Additive Manufacturing Standardization Collaborative (AMSC). For the past several years he has served as a lead organizer of several symposia on additive manufacturing for both ASM and TMS.

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    Book preview

    Top 5 Technical Indicators for ETF Trading - Jing Zhang

    Authors

    Chapter 1: ETF Basics

    Introduction of ETF

    ETF stands for Exchange Traded Fund. ETFs are traded on the stock exchange, but like a mutual fund. They comprise a basket of assets.

    The first ETF SPDR was debuted by State Street Global Advisors in January 1993. ETFs have witnessed gigantic demand and accumulated asset value rapidly since then. The number of ETFs grew to almost 1,200 with totaling asset values of $1.3 trillion by the end of 2012. It was estimated that the total asset value of ETFs might reach $2 trillion by the end of 2013.

    One way to comprehend ETFs is to treat them as mutual funds but trade them like stocks. Trading like a stock is just one of the many features that make ETFs so well-liked, particularly with professional investors and active traders. Let's review some of the advantages of ETFs.

    Advantages of ETF Trading

    According to Investopedia, By owning an ETF, you get the diversification of an index fund as well as the ability to sell short, buy on margin, and purchase as little as one share. Another advantage is that the expense ratios for most ETFs are lower than those of the average mutual fund. When buying and selling ETFs, you have to pay the same commission to your broker that you'd pay on any regular order. (1)

    Since an ETF compose a basket of assets, it can meet investors’ diversification needs. ETFs come in handy when investors want to create a diversified portfolio. There are over 1,000 ETFs available. ETFs track indices of broad-based US (Dow Jones, S&P, NASDAQ), international, country-specified (Japan, Australia, U.K. etc.), regional (Europe, Pacific Rim, emerging markets, etc.), industry (technology, energy, biotech, etc.), sector-specific (utilities, transportation, finance, etc.), bond, commodity, and market niches (REITs, gold, oil, etc.).

    Studies have illustrated that asset allocation and diversification is a key factor responsible for investment returns, and ETFs are an excellent means for investors to build a portfolio that meets specific asset allocation needs. For example, an investor seeking an allocation of 75% stocks and 25% bonds can easily realize that portfolio with ETFs. That investor can even continue to diversify by dividing the stock portion into large-cap growth and small-cap value stocks, and the bond portion into bonds with different maturity dates. Or, it would be just as simple to create a 25/75 bond-to-stock portfolio that includes ETFs tracking long-term bonds and those tracking REITs. The abundance of ETF choices enables investors to readily create a diversified portfolio that meets allocation goals.

    ETFs also include other asset categories, such as fixed income which allows the investors to gain a fixed amount of profit on a fixed schedule. Even if ETFs offer limited choices in fixed-income investments, there are still plenty of options, including bonds with varieties of terms. According to trading agreement, gains from dividends are allowed to be deposited into a trading account or to be reinvested. You should verify the expense and cost before you decide to reinvest your dividends in a dividend-paying ETF, as only some brokerage firms offer dividend reinvestment at no costs.

    ETFs are traded like stocks, in terms of real time span and continuous price changes during a trading day. You even can trade them at extended hours. ETFs possess characteristics similar to stocks. Thus, investors are allowed to trade on margin to magnify income, and sell short to hedge or protect your portfolio as well. Traditional mutual funds take orders during Wall Street Trading hours, but the transactions actually occur at the close of the market at 4:00 pm EST. The selling price is the sum of the closing day prices of all the stocks contained in the fund. ETFs, by contrast, trade instantaneously all day long, and allow an investor to lock in a price for the underlying stocks or indexes immediately.

    When you trade ETFs, you only need to closely observe the macroeconomic environment, instead of each individual company’s PE ratio, management, profit margin, etc. You do not need to do much fundamental analysis on individual companies.

    Most ETFs, especially index ETFs simply simulate underlying securities or indices. They are not subject to trading fees and commissions on a regular basis, incurred by fund managers who endeavor to beat the general market. ETFs are cost-effective to own and hold over the long time period. This feature makes them specifically appealing to the typical buy-and-hold investors. ETFs charge extremely low annual fees, (as low as 0.04% of assets compared with 1.4% for average mutual fund fees (according to Morningstar). You could create a full and well-diversified portfolio utilizing ETFs only! Every investor loves to save management fees, especially those investors who place their savings into their portfolios. In helping investors save money, ETFs really compete very well with other securities. ETFs for underlying stock market indices charge even lower turn-over and management fees.

    As you might know, the Vanguard 500 Index Fund is often known as one of the least expensive to maintain index funds. The Vanguard fund’s approximate 20 basis points of expense ratio are tremendously lower than the 100 plus basis points which are usually charged by other mutual funds. However, if you compare the SPDR 500 ETF with the Vanguard 500 Index fund, the approximate 10 basis points expense ratio charged on SPDR 500 ETF are about 50% lower than the Vanguard 500 Index Fund. This puts other equity funds to shame!

    As previously mentioned, like traditional stocks and bonds, ETFs can be traded intra-day plus during extended hours. This option facilitates risk-taking traders to trade along the near-term market movement through ETF trading. For example, if the stock market is experiencing a steep rise or decline during trading hours, it allows speculators to take advantage of volatility by purchasing an ETF that mirrors the index, and realize the gain before the market makes a turn.

    Investing in a mutual fund that mirrors the S&P 500 does not provide this capacity. A mutual fund can’t allow speculative traders to profit from daily fluctuations, since each mutual fund can only be redeemed at the market close of each trading day and only has one price. Especially when catastrophic events occur in the market, the ETFs traders can escape from the financial disaster promptly.

    Be mindful that because ETFs trade through a brokerage firm, each trade incurs a commission charge. To avoid letting commissions shrink your profit margin, shop for a low-cost brokerage. ETFs also facilitate a buy-and-hold investor who is in a position to execute a large, one-time investment, and then wait for his equity to grow.

    ETFs are favored by investors who like to reduce their tax burden. In terms of tax efficiency, ETF portfolios are even more preferred compared with index funds. Generally speaking, investors are provided more tax benefits especially when he trades large quantity of ETFs. Selling ETFs is different from mutual fund redemption. It does not necessarily force fund managers to dump shares of underlying securities. Be aware that this process incurs capital gains and taxes. Therefore, the investor can defer taxes until the investment is actually sold. On the other hand, more frequent trading activity, and the different regulatory structure of mutual funds generate higher taxes as well. Moreover, an investor can opt for ETFs that don't have large capital gains distributions.

    It is easy to comprehend the reason that ETFs have gained in popularity. Their associated costs are low, and the portfolios are flexible and tax efficient.

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