ETFs – Narrowing Down the List

There are currently hundreds of ETFs to choose from, and the list is growing at a rapid pace. It seems the list is getting too large, with much overlap between different securities. There might be a slight difference in the long run comparing one ETF to another that has a slightly different weighting or style. As trading vehicles it is more important to stick with those that offer the greatest liquidity. If you narrow the list down to the actively traded ETFs, and those that also offer actively traded options, the list becomes quite small and manageable. The following list is not complete, but in my opinion it offers plenty of choices for most market environments. Of course, this list is subject to change as volume patterns change.

The first on the list, and probably the most important as trading vehicles, are the major index ETFs. These ETFs are also available with a growth or value style, however the basic indexes in all cases have far greater volume and liquidity. All these major indexes have options priced at one full point increments, with the QQQQ and SPY being by far the most liquid with the tightest bid/ask spreads.

QQQQ – PowerShares QQQ Trust
SPY – SPDR S&P 500 Dep Receipts
DIA – Dow 30, Diamonds Trust
IWM – iShares Russell 2000 Index Trust
MDY – S&P Midcap Dep Receipts

For sectors the following four SPDRs are good trading vehicles. All have options with the XLE and XLF being the most liquid.

XLE – S&P Select Energy SPDR Fund
XLF – S&P Select Financial SPDR Fund
XLU – S&P Select Utilities SPDR Fund
XLB – S&P Select Basic Materials Fund

Other SPDRs in the group are the following, however these have much less trading volume and much thinner option open interest. But these securities are useful to keep track of overall sector performance.

XLV – S&P Select Health Care SPDR Fund
XLI – S&P Select Industrial SPDR Fund
XLK – S&P Select Technology SPDR Fund
XLY – S&P Select Consumer Discretionary SPDR Fund
XLP – S&P Select Consumer Staples SPDR Fund

The following HOLDERS offer good liquidity.

SMH – Semiconductor HOLDRS
OIH – Oil Service HOLDRS

The following overseas ETFs are the most liquid for trading, however there are many more available if you want to target a specific country or region on a longer-term basis.

EWJ – iShares Japan Index Fund
EEM – iShares MSCI Emerging Markets Index Fund
EFA – iShares MSCI EAFE Index Trust
EWZ – iShares MSCI Brazil Index Fund
FXI – iShares FTSE/Xinhua China 25

The following funds track precious metals (options not available on these):

GLD – Street TRACKS Gold Trust
SLV – iShares Silver Trust
GDX – Market Vectors Gold Miners ETF

A few miscellaneous funds you might want to look at:

USO – United States Oil Fund LP
IYR – iShares DJ US Real Estate Index Trust
TLT – iShares Lehman 20+ Year Treasury Bond Fund
XHB – Street TRACKS SPD Homebuilders

Also, for those who want leverage, and the ability to trade an ETF from the long side but want to trade as if on the short side, you might check out the Proshares funds. There is a link on the resources tab on this blog. Here are the main choices for the leveraged short ETFs (options not available on these):

QID – UltraShort QQQ ProShares
DXD – UltraShort Dow 30 ProShares
MZZ – UltraShort MidCap 400 ProShares
SDS – UltraShort S&P 500 ProShares
TWM – ProShares Ultra Short Russell 2000

Here are the leveraged long ETFs:

QLD – ProShares Ultra QQQ Trust
DDM – ProShares Trust Ultra Dow 30
MVV – ProShares Ultra MidCap 400
SSO – ProShares Ultra S&P 500
UWM – ProShares Ultra Russell 2000

Note: The above ProShares are also available, long or short, in the non-leveraged version as well. It makes little sense to me to trade the non-leveraged long variety as there is much better liquidity just sticking the much more active ETFs as listed in the first category of this article. However, if you can’t trade on the short side, ProShares does offer inverse non-leveraged choices. Refer to their website for more information. Also, the Ultra ProShares try to have 2:1 leverage. In reality the leverage might be slightly less. Do your own research.