As the markets bounced back in 2009, investors poured money into exchange-traded funds (ETFs), which held a record $776 billion domestically at the end of the year. ETFs are popular trading tools among technical analysts, because they offer access to market indices, sectors, countries, commodities, and leverage. However, although ETFs trade like stocks, they aren’t individual equities, so technicians must be careful when analyzing them. Indicators that work with individual stocks may not work with equity ETFs. Specifically, volume analysis is less reliable on ETFs, unless adjustments are made. Instead of analyzing an ETF’s volume, traders should focus on the volume of its largest underlying stock holdings. Read on to learn more.
ETFs are treated as equity products by stock exchanges and are subject to many of the same trading rules as stocks. But there are important differences that investors should understand.
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Exchange traded products (ETPs) are subject to market volatility and the risks of their underlying securities which may include the risks associated with investing in smaller companies, foreign securities, commodities and fixed income investments. Foreign securities are subject to interest rate, currency-exchange rate, economic and political risk all of which are magnified in emerging markets. ETPs that target a small universe of securities, such as a specific region or market sector are generally subject to greater market volatility as well as the specific risks associated with that sector, region or other focus. ETPs which use derivatives, leverage, or complex investment strategies are subject to additional risks. The return of an index ETP is usually different from that of the index it tracks because of fees, expenses and tracking error. An ETP may trade at a premium or discount to its Net Asset Value (NAV) (or indicative value in the case of ETNs). The degree of liquidity can vary significantly from one ETP to another and losses may be magnified if no liquid market exists for the ETP's shares when attempting to sell them. Each ETP has a unique risk profile which is detailed in its prospectus, offering circular or similar material, which should be considered carefully when making investment decisions.
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