Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Strictly Buy and Sell Set Ups -- Ignore unavailable to you. Want to Upgrade?

To: DanZ who wrote (2265)	2/13/2005 9:55:30 PM
From: profile_14	Read Replies (1) \| Respond to of 13449

Dan, you are right in saying that one cannot measure money flows into an index. After all, it is a compilation of different weights for different stocks that comprise it. However, it would be hard to argue that since an exchange traded fund like the OIH, and various others such as the XLE that you have mentioned, is comprised of various stocks, one could not construct it. I have actually constructed various real-time spreadsheets linked to a live Bloomberg terminal in an attempt to reconstruct the exchange traded fund. My objective was to see if there was any way to make money off a mispricing. In these two instances, XLE and OIH, there is not. The premium or discount that the ETF trades at is never any greater than one-half percent, and in most instances, it is around 0.2%. I ran this for days looking at variances and if one were to try to game it by buying the basket of stocks and selling short the ETF, or vice-versa, the execution costs would eat you alive. That would be the way to play convergence of the spread. Therefore, I would find it hard to believe that any money flows for the ETF would contradict the weighted average money flows of the basket comprising the ETF. If you go to the respective web sites, they will tell you how to construct it by piecing together so many shares of each stock. As a side note, the OSX and the OIH do not have identical baskets or weightings, they are not even close to each other. The OSX includes E&P companies along with many more names. If I recall correctly, there are fewer than 20 names in the OIH (either something like 17 or 13 names comes to mind), and nearly twice or more in the index. ETFs are extremely efficient vehicles as they are priced every 10-15 seconds, and because they allow you diversification. They are liquid and well worth analyzing. The spreads are very tight, obviously because if they were not, someone would make the convergence trade I just discussed. One idea though is to look at option volatilities in the underlying symbols and that of the ETF, perhaps there is a way to sell higher volatility in a couple of names and buy lower volatility in the ETF, hoping that the fact that the few higher names will not diverge from the ETF. Again, it would be my belief that the weighted average volatility of all the names would reflect the ETF volatility, although the ETF volatility is indirectly computed. Best regards,