In Praise Of Etf's

I bring learned about years agone that ETF's are foreign as well as wonderful creatures. Simple, long-only mean-reverting strategies that hold upwards real good on ETF's, won't hold upwards on their gene stocks. (Check out a overnice collection of these strategies inwards Larry Connors' majority "High Probability ETF Trading". He has every bit good packaged these strategies into a unmarried indicator, the ETF Power Ratings, on tradingmarkets.com.) Simple couple trading strategies similar the i I discussed inwards my book, every bit good hold upwards much to a greater extent than poorly on stocks than on ETF's. Why is that?

Well, i obvious argue is that, every bit Larry mentioned inwards his book, ETF's are non probable to acquire bankrupt (with the notable exception of the triple-leveraged ETF's, every bit I explained previously), because a whole sector or terra firma is non probable to acquire bankrupt. So y'all tin sack pretty much count on mean-reversion if y'all are on the long side.

Another obvious argue is that though at that topographic point are word which volition touching on the valuation of a whole sector or country, these aren't every bit frequent or every bit devastating every bit word affecting private stocks. And believe me, word is the biggest enemy of mean-reversion.

But finally, I believe that the upper-case alphabetic lineament weightings of the gene stocks every bit good play a business office inwards promoting mean-reversion. Typically, weighting of a gene stock increases amongst its marketplace pose capitalization, though non necessarily linearly. Perhaps large-cap stocks are to a greater extent than prone to mean-reversion than small-cap stocks? But to a greater extent than intriguingly, tin sack nosotros non build a handbasket of stocks, amongst custom-designed weightings, amongst the objective of optimizing its short-term mean-reversion property? I (and others earlier me) bring done something similar inwards constructing a handbasket of stocks that cointegrate best amongst an index. Can nosotros non build a handbasket that is but stationary (with perchance a constant drift)?

Now, perchance y'all volition concord amongst me that ETF's are foreign as well as wonderful creatures.