All About Index Shares
New
Opportunities arise with ETFs:
SPDRs, DIAMONDS ,
QQQQ or WEBS. Whatever you want to call them, they
are grabbing an increasing share of interest and resources from
sophisticated investors.
Because of that the technical analysis of the major U.S. indexes and
Exchanges has become of the trading these ETFs. The first index shares created by
Amex were SPDRs, or Standard & Poor's
Depository Receipts.
Separate SPDRs were created for the
S&P 500 and the
S&P Mid-Cap 400. Trading in
SPDRs was introduced in 1993, and
the S&P Mid-Cap 400 began in 1995. Seventeen World Equity Benchmark
Shares (WEBS) began trading a fixed basket of country securities in
1996. DIAMONDS, an index product based on the
Dow Jones Industrial
Average, began trading in early 1998.
Once created, the depository receipts trade just like common shares of
stock. They can be traded in round or odd lots, and trade between the
hours of 9:30 a.m. and 4:15 p.m. They pay dividends, but unlike stocks,
can be shorted on downticks, which enhances liquidity.
The annual expenses on SPDRs are lower than expenses on most mutual
funds, and the index shares are more tax-efficient. They
appeal to short sellers because they can be shorted in falling markets
when downticks occur, which can’t be done with individual stocks. They
are highly liquid, and can be traded intra-day when sharp movements can
occur, rather than only at the end-of-the-day price provided for mutual
funds.
ETFs (also called index shares) track a specific basket
of securities and trade continuously on the major exchanges like an
ordinary stock. The pioneering big daddy of ETFs was the Standard &
Poor's Depositary Receipts (AMEX:
SPY) -- also known as SPDRs, pronounced "Spiders" -- which
appeared in 1993. These were followed by the Dow Diamonds (AMEX: DIA), a basket of the 30 Dow stocks, and the
NASDAQ 100
Shares
(NASDAQ:
QQQQ) -- a.k.a. Qubes -- which track the NASDAQ 100 stock
index. Even though they've only been around since March 1999, Qubes are
so popular, their daily trading volume rivals the companies on the New
York Stock Exchange. (Today, only three companies on the Big Board
traded more briskly.)
Another advantage is that ETFs can be shorted and bought on margin. We
don't think that borrowing money to buy stocks is a smart way to invest,
although in limited amounts by experienced investors it can be useful.
Perhaps the greatest benefit of ETFs is that they bring investors
instant exposure to a diversified portfolio of stocks.
For many investors with a long-term vision who can embrace the benefits
of ETFs without falling into the trading traps that accompany it,
investing through ETFs can be quite rewarding to the pocketbook, and a
superior alternative to mutual funds.
By trading the index, you eliminate concerns about picking the right
company, balancing industry weightings, or incurring the cost of trading
individual stocks. Best of all, you eliminate the traditional bias to
the upside, so you can profit from both bull as well as bear markets.
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