Trading through bullish, bearish, chop…
We all know what ETF stands for – Exchange Traded fund – but what does that really mean? Until you grasp what symbols make up an ETF, not to mention how to trade them…
You’re going to continue missing out on some great opportunities.
An ETF is a basket of stocks that are often broken down into sectors. A sector is marked by stocks that are related to each other in a certain category.
Let me explain.
For example, stocks such as Proctor and Gamble, Coke, Pepsi, Walmart, Costco are put into the ETF XLP, which is referred to as “consumer staples.” Consumer staples means basic or necessary items and services that consumers commonly use.
The stocks themselves are also symbols that we commonly trade.
ETFs tell us not only what’s happening at a specific, say granular level in stocks, but also what’s happening in a specific sector. We can see where there is participation and who’s buying what.
There are literally thousands and thousands of ETFs, but there are really only a few that are becoming more and more influential.
Just like the indices (S&P, Dow, NASDAQ) ETFs are made up of individual stocks. The difference is ETFs are often categorized by a sector in the markets. Let’s look at some of the most influential ETFs.
- Financials (XLF)– Berkshire Hathaway, JP Morgan, Bank of America, Wells Fargo.
- Healthcare (XLV)– Johnson & Johnson, United Health, Pfizer, Abbott.
- Consumer Staples (XLP)…Proctor and Gamble, Coke, Pepsi, Walmart, Costco.
- Technology (XLK)– Apple, Microsoft, Invidia, Salesforce.
Notice they’re super common names that we love to trade, but we don’t necessarily look at them collectively.
We commonly make the mistake of pitting these symbols against each other. In reality, these sectors give us a bird’s-eye view of what’s happening in the market.
ETFs provide us the transparency to understand what’s going on. Following ETFs prepares us for chop and every other market condition out there including downtrends and of course, uptrends.
Let’s face it, the markets are always going to change. We have to be able to adapt.
And how does this work?
When you’re looking at these sectors, you can see where the money is going by measuring the volume and price of each ETF. This gives you a major advantage over traders looking at only the broader averages like, again, the indices – S&P, Dow, NASDAQ.
This is the edge you can use to decide what you should be looking at, and equally, what you can have the confidence to stay away from. Knowing what to trade is equally as important as knowing what not to trade.
These ETFs will help you direct your way through the equities markets, by seeing stocks on that more specific, granular level without (and this is the part that I love) having to go through thousands of symbols and even worse, disconnected symbols – you’re really not certain why they’re moving and with what other symbols.