Using ETF Volumes to Identify Market Themes

A very nice set of ETF resources can be found on the Morningstar site, which tracks the returns of ETFs over 1 month, 3 month, 1 year, 3 year, and year-to-date time frames and ranks the ETFs by trading volume. A particularly unique feature identifies ETFs relative to their "fair value", so that investors can identify undervalued opportunities. A screener also helps traders identify ETFs by their investment style, returns, and expense ratios.

When we look at ETF performance and volume, we can gain some insight into hot market themes. Not surprisingly, ETF daily volume is dominated by the SPY and QQQQ instruments for the S&P 500 Index and NASDAQ 100 Index, respectively. After that, it gets interesting. The third most popular ETF as of Thursday's trade was the S&P 500 Index financial stock sector ETF, XLF. It is down over 11% over the past month, compared to SPY, which is only down 2.58% over that same period. The high volume decline suggests widespread pessimism about this sector, despite Fed (and sovereign wealth fund) attempts at relief.

Fourth and sixth in volume are the UltraShort vehicles for the QQQQ (QID) and SPY (SDS). These enable traders to take double-size short positions on the indexes, and thus are instruments favored by very bearish participants. Since the start of 2007, 20-day volume in QID, for example, has expanded over 10 times. Once again this speaks to the pessimism of market participants--and their desire for leverage, a theme I'll be touching upon in my next post.

Significantly, we have ETFs representing market indexes from Japan (EWJ), Emerging Markets (EEM), Brazil (EWZ), EAFE (EFA), and Taiwan (EWT), and Hong Kong (EWH) in the top 20 volume list--a strong indication of the degree to which investors and traders are taking a global perspective on markets and diversifying beyond the U.S. It is interesting to see the Brazil ETF at #9 in volume, given that it is up over 9% in the past month--a clear outperformer relative to U.S., Asian, and European bourses.

Finally, also within the top 20 ETFs for volume are instruments for S&P 500 energy stocks (XLE), S&P 500 materials stocks (XLB), and gold (GLD). This is a clear reflection of the flow of money into commodities and commodity-related issues. All three are up on a one-month basis, a notable contrast to the broad indexes, which are all lower over that period.

The above, of course, is a static view of volume and performance. It is the flow of funds in and out of ETFs that help us identify sectors and themes gaining favor. By tracking these statistics over time, we can follow in the footsteps of institutional investors and ride important market trends.

Comments

[JohnTandlich]

Brett, you are the first to cogently identify a free and easy to use tool for identifying momentum ETFs. Thanks.