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Exchange Traded Funds (ETF’s) can be a great low cost investment vehicle for either short term traders or long term investors.  The advantages of ETF’s are:

• Instant diversification
• Low fees
• Intra day pricing
• Better tax advantages as compared to index mutual funds

For short term ETF traders, especially option ETF traders, it is crucial to find active ETF’s with the following characteristics:

• low fees
• high trading volume
• optionable with high open interest and daily volume
• small BID / ASK spreads for options

It should be a simple task to find ETF’s with the above characteristics.  Unfortunately, two of the brokers I checked – OptionsXpress and TradeKing – have no such way to screen by the most active ETF’s.  Both have great ETF scanners to screen by performance and other attributes, but neither by most active.  Fortunately, I found a link at Schaeffer’s Research to screen by most active.    The output of the Schaeffer’s screen is limited to symbol, name, last price, change in price, and volume.  Below is a snapshot of the most recent results.

Most Active ETF’s:

• SPY – S&P 500 ETF.
• QQQQ – Nasdaq 100 Trust.
• XLF – SPDR Financial.
• EEM – iShares emerging markets.
• IWM – iShares Russell 2000
• EWJ – iShares Japan index.
• ITR – iShares real estate index
• XLE – SPDR Energy
• USO – US Oil Fund
• EWZ – iShares Brazil Index.
• EFA – iShares EAFE Index
• SMH – HOLDRS Semiconductor
• DIA – Diamonds Trust (Dow Jones Index)
• EWT – iShares Taiwan Index
• XLB – SPDR Materials
• XLI – SPDR Industrial
• XLU – SPDR Utilities
• EWA – iShares Australia
• OIH – HOLDRS Oil Service

To find the most recent management fees on the above ETF”s, see the following:

• iShares
• HOLDRS
• United States Oil Fund
• Select Sector SPDR

To find out if the above ETF’s are optionable, check the option chain.  Also be sure to verify whether the average BID ASK spread on the options is small enough for your investment style.

To emphasize the importance of using high volume active ETF’s in your own option trading, consider the option chains  below of a recent option chain comparison between XLE (Energy ETF, 8th most active ETF) and IEO (iShares oil and gas exploration energy fund).  To be clear, the objective and components of XLE and IEO are definitely different.  But if all you want is an energy ETF with better BID ASK option spreads, then you may want to consider XLE over IEO because it is more active.

Smart Money Magazine recently ran a story in their July issue titled When To Get Back In the Market.  For the article they interviewed economists, managers and strategists to find out the signs of detecting a true long term rally.  Here are some of the signs:

• Stock Market Moves – A potential long term rally will have good performance across all sectors, not just a handful.  To view a snapshot of all sectors, check out this Morningstar sector link.
• Borrowing and Lending – When corporations can get the money they need to expand their businesses and hire new employees, it could mean a healthy environment for a recovery.  The TED Spread is a commonly used metric, which compares the difference between the interest rates on treasury bills vs other kinds of loans.  When that difference is low, it suggests that companies can borrow at attractive rates, which is a sign of a potential recovery.  Check out the TED spread rates here.
• Business Hiring and Spending – Check the unemployment claims at the department of labor website for signs of a longer term recovery.
• Consumer Behavior – Check the consumer confidence numbers at the Conference Board business trade group, and look for consecutive months with scores about 50.
• Housing – Look for new housing starts numbers at the Census Bureau’s New Residential Construction index.

Or, if you have no time to look at all of these indexes, you can use a simple technical analysis approach to investing, you can use one of the options from the post below:

• Technical Analysis – Simple, Complex, and Black Swan

Preferred shares are becomming surprisingly more attractive these days, even among retail investors.  One reason for the renewed interest is because of the world’s financial crisis, and a general mistrust of governments constant market rule changes.  Preferred shares are also being talked about almost daily on CNBC, especially for insolvent financial institutions that were deemed “to big to fail“, but not “to big to bailout“.   For insolvent financial institutions, it is readily believed that the common shareholders will eventually all be wiped out.  But with what seems like unlimited government backing (at taxpayers  expense, of course), investments in preferred stock may still come out ahead.

What is preferred stock? – From wikipedia,

Preferred stock, also called preferred shares or preference shares, is typically a ‘higher ranking’ stock than voting shares, and its terms are negotiated between the corporation and the investor.

Preferred stock usually carries no voting rights, but may carry superior priority over common stock in the payment of dividends and upon liquidation. Preferred stock may carry a dividend that is paid out prior to any dividends being paid to common stock holders. Preferred stock may have a convertibility feature into common stock. Preferred stockholders will be paid out in assets before common stockholders and after debt holders in bankruptcy. Terms of the preferred stock are stated in a “Certificate of Designation”.

Notice two important points from above:

1. As more and more dividends are being wiped out in common shares, many preferred shares are still paying on them.
2. Preferred shares have PRIORITY of payment over common shares.

There are some other key differences in preferred shares, as explained by this USAToday article.  First, dividends from preferred shares may not qualify for the lower dividend tax rate (currently 15%).  Second, investing in preferred shares can be confusing, because they are really like a mix of stocks and bonds.

Other advantages of preferred shares are less price volatility than common shares, and greater liquidity than corporate bonds.  Other disadvantages of preferred stock are lack of voting rights (if you care), interest rate sensitivity, and callability.

CNBC’s Karen Finerman (the smartest one on the Fast Money show) has announced she is using preferred shares in her hedge fund as a long/short strategy.  She mentioned she is LONG Bank of America preferred shares, and SHORT the common shares. For an explanation of the “long/short strategy”, check out the geldpress article on hidden jewel in the shorts.

Buying preferred shares is pretty straightforward and very similar to buying any other shares in common stock.  As for picking preferred shares, its a little trickier, and requires on specialty websites that host preferred share content, such as QuantumOnline (registration required).  And for those of you who like the idea of preferred, but simply can’t be bothered to pick among them, there are easier (although not necessarily better) methods, such as investing in the ishares U.S. Preferred shares index fund (symbol PFF).  Similar offerings may also be available at other brokerage institutions.

Finally, if you are serious about investing in preferred shares, there are some good books to help guide you.  I would recommend this recently released Preferreds as a start, by Ken Winans.

Preferreds by Ken Winans

First, this is **NOT** in any way to be considered advice!  But I do like the action on AAPL, with the stock trading BELOW the $80 support level in after hours due to the announcement relating to Steve Jobs’s leave of absence.

At or near the $80 level, I like the following combination calendar collar play:

• Buy 100 shares of AAPL (target $75-$82)
• Sell (1) April $80 covered call – (target $11-$13)
• Buy (1) February $75 Put – (target $2-4)

Apple should report earnings next Wednesday January 21st – after January options expiration.  The February PUT is used for protection from what may be a catastrophic earnings report.  If AAPL tanks after earnings, then I will look to take profits on the February PUT.  Timing is important as it is best to take the PUT profits when you think AAPL reaches a good and stable BOTTOM.  I may also close the covered call early and take profits, and perhaps sell a lower strike covered call at some point.

If AAPL reports good earnings and the stock remains stable after earnings, then I may close the February PUT early – probably for a small loss.   In closing the PUT, the covered call will still offer decent protection, but it is limited.

One last note.  This is not a premium service.  There will likely be no trade updates. You should only attempt this or similar options trades if you are comfortable managing the positions yourself.

If you want to read an excellent book on stock option adjustments, please purchase the following:

The Option Trader Handbook: Strategies and Trade Adjustments (Wiley Trading) by George Jabbour

Here at Geldpress, I rarely talk about what I am personally buying or selling in my own accounts.  Instead, I focus on interesting market news, trading strategies and stock options mechanics, fundamentals, and other macro views.  I never seem to have time to research and write about everything on my list, but I do manage a consistent stream each week.

If you really want stock picks, there is certainly no shortage of insanely stupid advice on websites everywhere, such as:

• Smartmoney just released today’s 3 stock picks, including LEN, HBC, and ADM.  To be fair, they are advising BUYING ADM and LEN, and SELLING HBC.   My thoughts are that I would not touch Lennar or any other ridiculously stupid homebuilder right now, or for the foreseeable future!  But I won’t short them either because there are to many insanely stupid fund managers and government plunge protectors buying the shares.  As for ADM, I do like the industry and I almost like the valuations but I won’t touch ADM.  I prefer Mosaic (symbol MOS), because they have a much more manageable debt load than ADM.   As for HBC, it’s the only thing I agree with – SELL, SELL, SELL.
• Jim Jubak just published an article called 5 stocks for even gloomier times.   Jubak may be the number one financial commentator on MSN money, but that certainly doesn’t mean I agree with anything he says.  On the contrary, I RARELY AGREE with any of his ridiculous jargon.   As for his recent article, he just added McDonald’s (MCD) to his Jubak’s Picks portfolio.  I agree that McDonald’s is a well run company with good earnings potential, but the current valuation is ridiculously high, as I stated here.  My personal strategy with McDonald’s is to patiently wait for the $50 or lower range to BUY.  And in the $62 and higher range, I want to short it – either directly or through PUT options.  As for Jubak’s previous picks, HBC was high on his list in November, and I disagreed with him here.  Shares in HBC have come down significantly since Jubak recommended it.
• Warren Buffett – I do respect and admire the guy, but anyone thinking they can watch his new and top holdings reports for an opportunity to buy is destined to lose money.  Warren Buffett has always stated he only buys what he understands.  If that is indeed the case, then why on earth is he buying Moody’s (MCO), Goldman Sachs (GS), and Bank of America (BAC)?!?!?!  Note to Buffett:  Nobody on earth understands financial companies! STOP BUYING THEM! On the other hand, I do like his purchases of Coca Cola (KO) and Kraft Foods (KFT) but I do not necessarily agree with his timing and valuations.

Disclosure: I am long Mosaic (MOS), but with covered calls in place to limit some risk.  I am long Kraft (KFT), but always looking for the right opportunity to hedge with a covered call.  I am short HBC with a March PUT option.

Disclaimer: TRADE AT YOUR OWN RISK!!!