ETFs: The Most Dangerous “And Most Popular” Market (SPY, SDS, SSO, SH, SPXU)

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October 19, 2011 12:28pm NYSE:SPY

Andrew Snyder: The ETF market is extremely popular. But, in the end, most investors lose money trading ETFs.  Something is wrong on Wall Street. If you paid attention yesterday, you saw Janet Napolitano ring the opening bell at Nasdaq headquarters. Scary stuff.

The Department of Homeland Security has invaded the morning perch of corporate America. It wasn’t the CEO of a fresh offering that got us going. It wasn’t the man behind a kick-butt earnings report. It wasn’t even somebody responsible for a monthly P&L.

It was Big Brother — or in this case, Big Sis.

Any other time, we’d be worried. But these days… who cares? It’s one crook amongst many others.

Actually, Napolitano’s action helps us make a point. Wall Street is a dangerous place. If you’re looking to get robbed of your life’s work, there’s no better part of town than the financial district. Its thieves will steal from you in broad daylight… they’ll even hand you a receipt.

If DHS were truly looking to help Joe Sixpack… Wall Street would be a great place to start.

Investing today is not like it used to be. Wally and the Beav have long been replaced by Bernie and Raj (who was put away for 11 years last week). The game is oozing with crooks and cheats.

But the average investor has no clue. They’re the perfect mark.

The ETF Market

Take, for instance, exchange-traded funds (ETFs). Sold by the industry as “safe and simple,” they have become anything but.

Teeka Tiwari, dubbed the ETF Master Trader, recently told me most investors who trade ETFs end up losing… and losing big.

The reason is simple… they don’t know what they’re getting into.

Get this. The ETF market makes up a full third of the value of the U.S. equities market. Last December, ETF assets eclipsed the $1 trillion mark for the first time.

Even as the markets have faltered in the past two months, the figure has remained strong. That’s because in times of volatility, ETFs become even more popular. When the market reaches extremes in volatility, ETFs can represent 40% of total assets.

Stepping back, it helps explain the strong correlations we’ve seen over the past 36 months. Instead of buying and selling thousands of individual stocks, the market trades in chunks — buying and selling just a few dozen popular ETFs.

That makes for dangerous swings… like the May 2010 “flash crash.”

You won’t hear much of it (because the mainstream outlets don’t know what it means), but some two-thirds of the trades cancelled by Nasdaq and the NYSE in the wake of the sudden plummet were ETFs or their cousin, exchange-traded notes.

Plain and simple, the system was overloaded. When a trillion dollars gets momentum, it’s hell to stop.

The action from the world’s most popular ETF — SPDR S&P 500 (NYSE:SPY) — tells the story. In the hours before the flash crash, SPY traded about a million shares a minute. So in five minutes, 5 million shares changed hands.

As the crash unfolded… that changed quick.

Between 2:30 and 2:35, it was 10 million shares. In the next five minutes, it doubled to 20 million. Five minutes later… 30 million. All told, about 85 million shares changed hands during the 20-minute meltdown.

The average ETF investor had no idea what was going on. While they drove to the doctor, or sold cars, or sat on the beach… the portfolio they worked their whole life for — and depend on — melted.

The ETFs that were supposed to be so easy and so simple collapsed under their own weight.

It is a theme that is not going away.

The next time it happens, it may not be a systemic breakdown. It could be a single headline. It could be a nasty flu outbreak. Or, the purpose of Napolitano’s visit, it could be a cyberattack. But my guess is it will come from Europe and its mess of a synthetic ETF market.

No matter what, you need to understand the risks you take. You need to understand how ETFs really work and, most importantly, how to trade them… for a profit.

I hope you’ve noticed I sent you an email yesterday on the subject. After realizing what lurks out there, I called in a favor and asked ETF guru Teeka Tiwari to let us into his ETF Master Trader course.

Right now, all you need to do is let him know you are interested. Teeka doesn’t need a firm commitment. But, with enough interest in the course, he will let us know the full details on Nov. 8.

Even if you’re not interested, the bottom line here is clear. This is not our father’s market. It’s bigger. It’s smarter. And it’s a whole lot meaner.

I have high hopes the ETF market will settle down and the Street will figure out a way to control the beast it’s become. But until it happens, it’s a virtual free-for-all… and your money is on the line. This is a story we are going to see much, much more of.

Related ETFs: SPDR S&P 500 ETF (NYSE:SPY), ProShares UltraShort S&P500 ETF (NYSE:SDS), ProShares  Ultra S&P500 ETF (NYSE:SSO), ProShares Short S&P500 (NYSE:SH),  ProShares UltraPro Short S&P500 ETF (NYSE:SPXU).

Written By Andrew Snyder From The Taipan Publishing Group

Andrew Snyder is the Editorial Director of Taipan Publishing Group and the Managing Editor of Taipan Insider.  Andy’s first year in the world of finance and investing involved  learning the intricate details of the financial industry, as an advisor.  He specialized in handling the vast portfolios of very wealthy clients,  where he excelled at making them even wealthier. Since then Andy has  received his MBA, published an award-winning book and been published in  numerous publications. He has also appeared on Fox News and other media  outlets.

With his  background in research combined with his hedge fund-style education and  knowledge of the market, Andy is acclaimed for his no-nonsense style of  writing and his sharp, deep-thinking analysis. His goal is to use his  knack for Wall Street research and analysis to lead his readers to  little-known profit opportunities. Andy’s readers  have described him as unshakeable, suspiciously knowledgeable and just a  bit nutty; these qualities have led him to uncover market-moving events  and turn them into reliable, double- and triple-digit gains.

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