Navellier Growth: your source for market-beating growth stocks

 

In recent years, a new product has exploded on the Wall Street scene that has had a profound impact on the markets. Exchange Traded Funds, or ETFs, are index funds that are traded on the exchanges. They are completely different from traditional mutual funds that are priced only once a day and cannot be traded throughout the day. Most of these ETFs are based on an index such as the Standard and Poor's 500 or Dow Jones Industrial average. There are also literally dozens of ETFs that track single-country stock performance such as the Japanese Nikkei or London's All Ordinaries index. The theory behind these products is that they allow investors to spread their money across different asset classes quickly and efficiently rather than having the need to buy hundreds of securities around the globe to achieve their goals.

What You Need to Know

Because they can be traded throughout the day and are index-based rather than actively managed, ETFs have created a few trading anomalies investors need to be aware of. The most glaring is that when investors decide to move into an asset class, such as the S&P 500, they buy shares of the appropriate exchange traded fund. As money flows into an area, the fund has to create new shares to keep up with demand. To accomplish this, the fund must buy the right number of shares of the index components, regardless of whether or not they are all good stocks.

For example, if investors want to flood into Japan, the fund mangers buy all the stocks in the index, not just the ones he thinks are a good buy. This can tend to push stock prices out of line, and many bad stocks actually move higher on this buying demand.

In addition, during the trading day, if investors bid up the ETF to a level where it is worth more or less than the actual index, Wall Street's more sophisticated traders will take advantage of this by buying or selling the index components to push prices back in line. This can also create pricing disparities, often elevating bad stocks in price or knocking down the value of the good ones.

The Impact on Buying & Selling

This can create two significant opportunities when you're hunting for great growth stocks. When the market is falling and the ETF managers are selling, quite often they make the decline worse than it should be. Now recall that they are going to sell all the stocks in the index not just the bad ones. This means some of the great growth stocks such as the market-beating ones I find for my subscribers will be temporarily on sale! If investors are piling into the market, the opposite can occur, and some of our growth names will be lifted to new heights very quickly right along with all the other stocks in the index. In some less liquid markets, such as ETFs tracking small cap indexes, or in smaller countries that have an Exchange Traded Fund that tracks their index, this trading has had a very large impact on intraday price swings, creating opportunities for growth investors to take advantage of short term mispricings for their long-term benefit.

As an investor on Wall Street, it's important to understand the impact ETFs have on today's market. And if you're investor interested in investing in ETFs, be sure to weigh the pros and cons heavily. You can find more information about ETF investing at our InvestorPlace website.

And if you're interested in a trading service that capitalizes on the price momentum in today's current market, I invite you to try my elite Quantum Growth trading service.

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