We’ve covered the basics of an ETF in a previous article here. Now, let’s look at arguably the most important ETF for equity day-traders.
There’s no buy/sell recommendations here. I’m demonstrating a cool way to utilize the $SPY ETF to improve your day-trading.
In case you missed the last article, we’ll quickly cover what an ETF is:
It’s defined as: ‘Exchange Traded Fund’ and you can trade them with a broker, like TradeZero, daily as if it were a stock.
What is an ETF?
There are endless definitions of ETFs on financial websites, such as Seeking Alpha, who describe it as:
“ ETF, or exchange-traded fund, is an investment security that combines some of the attributes of stocks and mutual funds. Like stocks, ETFs trade intra-day on an exchange. Like with mutual funds, many ETFs seek to track the performance of a benchmark index, such as the S&P 500.”
Using the $SPY ETF to improve your day-trading
It’s commonly said that four out of five stocks follow the overall market. So practically speaking, it makes sense to long stocks in a hot market and short stocks in a cold market.
We can also recognize particularly strong or weak stocks and or sectors by those who outperform or underperform when benchmarked against the overall markets.
But how do you track the overall market? Well, one of the easiest ways is to follow and track the $SPY ETF.
For those who don’t know what the $SPY ETF is, see below from Investopedia:
The SPDR S&P 500 ETF Trust, also known as the SPY ETF, is one of the most popular funds that aims to track the Standard & Poor’s (S&P) 500 Index, which comprises 500 large-cap U.S. stocks. These stocks are selected by a committee based on market size, liquidity, and industry.
The S&P 500 serves as one of the main benchmarks of the U.S. equity market and indicates the financial health and stability of the economy.
The $SPY ETF from March 15 - 31
The $SPY ETF bounced with strength off near year lows at around $415 to as high as the $460s totalling an 11% jump across two weeks.
We now know the average performance of the top 500 companies in the market. Let’s use it as a benchmark to see which companies outperformed or underperformed in the market.
Based on the results we will have some indication of what stocks and sectors day-traders and investors believe are hot or cold. Below are a few examples.
Did $TSLA outperform the $SPY ETF?
$TSLA fell with the rest of the overall market at the beginning of the year but then bounced in tandem with the $SPY. From March 15 – 31 the electric vehicle company jumped from the $770s to $1,150, a total jump of 49% - hugely outperforming the market average.
Thoughts: TSLA is a pioneer in the EV space and Elon Musk is somewhat of a global celebrity. Shareholders have been rewarded for their trust in the past so it’s no surprise that when the overall markets regain strength, $TSLA soars.
Did $BABA outperform the $SPY ETF?
Thoughts: $BABA, is often nicknamed the ‘Amazon of China’ due to it being the country’s largest e-commerce and cloud company. It’s an extremely hot prospect, not nearly the size of Amazon but with great growth potential.
This stock performed particularly well due to news that China would support Chinese IPOs abroad and called for closure on a tech crackdown. See more
Did $FB outperform the $SPY ETF?
$FB climbed from $184 - $239 totalling a nearly 30% increase in price outperforming the $SPY ETF the least. Why did $FB not perform as well as $TSLA and $BABA in such a strong overall market period?
Thoughts: Meta shares plummeted 26% at the beginning of February when the social media company forecasted weaker than expected revenue growth for the following quarter. Since then Meta has struggled to regain significant momentum.
Final thoughts on the $SPY ETF
A good indication of a company’s strength or weakness can be determined when it is benchmarked against the $SPY ETF average.
Four out of five stocks follow the overall markets, so using the $SPY ETF can be an effective way to know when to go long or short.
The $SPY ETF is a great indicator to measure strength and weakness but it’s still only one indicator. A good day-trader will use as many as he can to build a thesis that provides conviction.
If you’re curious about expanding your knowledge about other ETFs, here are some examples of other avenues:
Looking at other ETFs
The $SPY is actually only one ETF of many, let’s see a few more from Seeking Alpha:
Fixed-Income ETFs: Also known as bond ETFs, these funds track bond market indices, such as the Bloomberg Barclays US Aggregate Bond Index. Other common fixed-income ETF categories include government bond, corporate bond, tax-free municipal bond, international bond, emerging markets bond, and high-yield bond.
Commodity ETFs: Rather than hold the physical asset, which can be inaccessible or impractical for an investor, commodity ETFs track the price of a commodity, such as gold, grains or oil, or a basket of commodities, such as precious metals or agricultural ETFs.
Currency ETFs: As is the case with commodities, currency ETFs provide exposure to currency markets and foreign exchange trading (Forex) that may otherwise be inaccessible to the everyday investor. Currency ETFs may hold cash deposits in the currency being tracked or use futures contracts on the underlying currency.
Thanks for reading and if you have any questions or comments hit me up on Twitter @Jonk87.
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