Monday, March 30, 2015

032715 MS Weekly - Changing Landscape ETF Trading

Changing Landscape of ETF Trading
About Exchange Traded Products
Recently the world of Exchange Traded Funds ETFs has evolved into far more than the original concept of offering an alternative for Mutual Fund investors. As Money Central Banks have quietly under the radar acquired commodity companies in particular energy companies over the past few years, new trading and investing instruments have emerged.
No longer are ETFs merely Index Funds or Mutual Funds converted to an exchange tradable instrument. The new Exchange Traded Derivatives now offer a far broader scope of various financial markets providing more opportunities for individual investors and retail traders.

Most retail traders assume that an Exchange Traded Derivative whether it be it an Exchange Traded Fund ETF, Exchange Traded Note ETN, Exchange Traded Product ETP, or INDEX Fund can be “traded just like a stock.”  Theoretically that is a true statement but in actual real time trading how you trade an ETF, ETN, or ETP requires an understanding of how and why the ETD was created. This includes its intended targeted Market Participant Groups, its underlying Sponsor or Issuer and their intent, whether it is leveraged and by how much, whether it is weighted and how it is weighted, and the affect those conditions have on its price action.
As an example Giant Banks are starting to control energy and commodities via ownership in key companies and sectors. With their vested interest in energy and commodities the largest Exchange Traded Derivatives Sponsors and Issuers, are creating new Exchange Traded Products based on energy and commodities that correlate to Futures trading of these commodities.
Therefore learning how to use these new trading instruments to your advantage is crucial if choosing to trade these new ETDs.
A good example of these new trading instruments is the chart example below, created by a Money Central Bank for a publicly traded company.
It is not only a commodity ETP, it is also leveraged which means it moves 3 points for every 1 point move of the underlying asset in its Trust Fund.
This can be a useful new trading instrument for some retail traders who specialze in certain Commodities, Futures, or Index trading. However it is not ideal for beginners, novices, and those who have little education, training, or experience with leveraged ETPs and how the underlying Futures Market can impact this trading instrument on the stock exchanges.
This ETP will not trade “just like a stock.” It will react to the leveraging, weighting, and Futures Commodities Markets. It will also be affected by leverage adjustments that must be made by the issuers as the trust to the ETP becomes out of balance. This can occur mid-day for many of these instruments.
One rule all professional traders adhere to strictly is never trade an instrument you do not fully understand, have a complete education on how it works, why it moves the way it does, what indicators to use, and what trading style to use. Professionals do not rush to trade new instruments without first learning all they can about the underlying assets that can affect the ETP price action, which Market Participant Groups the ETP was created for, and how they intend to use if for long term investing or short term trading. Most losses retail traders have are due to an incomplete education, rushing into trading a new instrument they do not have adequate training or information on, and no experience for that new trading instrument.
Trade Wisely,
Martha Stokes CMT

Instructor & Developer of TechniTrader Stock and Option Courses
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