The Wagner Weekly
August 12, 2002

Table of Contents:

ETFs - A Stock Trading Revolution!
Deron's Weekly Report Card
Odds and Ends

ETFs - A Stock Trading Revolution!

I just returned back to my office from the Online Trading Expo. in Anaheim, California. It was a great event that inspired me with many new ideas! While sitting in Linda Raschke's seminar, I pulled up my Excel trading statistics and noticed there has been a steady increase in my profits during the past six months resulting from trading ETFs (Exchange Traded Funds) such as QQQ, SPY, DIA, SMH, BBH, PPH, etc. I also noticed an increased interest from conference attendees towards trading these and other ETFs because of the many benefits they offer. My first book, The Long-Term Day Trader, discusses the basics of the sector trading techniques that I use, which work great with trading sector-based ETFs such as the Semiconductor Index (SMH) and the Biotech Index (BBH). This book was still a hot seller at the show, which further confirms the trend that traders are indeed looking for alternatives to trading individual stocks and are instead turning to the many different types of ETFs.

An ETF (Exchange Traded Fund) trades on a stock exchange and has a ticker symbol just like a traditional stock, but is actually more like a mutual fund than a stock. Through ETFs, traders can buy or sell shares in the collective performance of an entire stock or bond portfolio as a single security. An exchange traded fund enables traders to effectively trade a basket of stocks within a particular market sector by trading a single security. The most liquid and best-known ETF is QQQ, which is the tracking stock for the Nasdaq 100 index. If you buy one share of QQQ, which is currently trading around $23, you are actually buying a small piece of each stock that trades on the Nasdaq 100 index. If you buy one share of SPY, you are buying a small piece of each stock that trades on the S&P 500 index. Just like a traditional stock, you can actively trade ETFs intraday or hold them overnight as you would with any other swing trade. The American Stock Exchange lists ETFs on more than 100 broad stock market, stock industry sector, international stock, and U.S. Treasury, and corporate bond indexes, providing a wide array of trading opportunities. ETFs provide a simple and effective way to trade in equity markets worldwide and the U.S. bond market through the purchase or sale of a single security.

Many of you know that I have always traded stocks based on the relative strength or weakness of specific market sectors such as Semiconductors, Oil, Retail, Pharmaceutical, etc. Prior to a year ago, if I wanted to take a long position in the Pharmaceutical index, I bought a basket of stocks such as MRK, JNJ, LLY, SGP, and BMY. This enabled me to achieve maximum profits with minimal risk through the power of diversification. However, a basket of only five stocks is not very diverse and it also costs five times the commission. This is why I became quite excited with the introduction of the ETF tracking stocks, especially those that track particular market sectors such as Pharmaceutical. In fact, because the benefits are so great, ETFs have become my primary source of trades every day for the past six months, as well as the basis for trades listed in The Wagner Daily. Here is why you should trade ETFs:

Reduced risk of obliteration! Do you ever wonder if you are going to wake up in the morning and have your stock be the next one to drop 50% that day because the CEO got caught with his hands in the cookie jar? The diversification factor greatly reduces this risk because there is minimal exposure to any one individual stock. For example, the biggest single exposure in the Semiconductor HOLDR stock (SMH) is Intel, which currently has a 21.18% weighting of the index. Reducing the odds of getting totally wiped out should always be your number one priority!

No uptick rule. Unlike traditional securities, ETFs are not subject to the uptick rule that prevents the short sale of securities on a downtick. This makes selling an ETF short much easier and quicker than with a traditional stock.

Lower trading commissions. Prior to ETFs, if you wanted to buy a basket of stocks within a particular sector, it could get expensive because you generated one commission for each stock you wanted to buy. With ETFs, there is only one commission to buy or sell short the whole sector.

Access to more markets. With ETFs, you now have access to markets that were previously unavailable to equities traders, such as Government T-bonds and many International markets. With new ETFs being created every month, the realm of trading opportunities keeps growing.

More follow-through. You have identified a particular sector you would like to be in, place the trade, then watch every single stock in the sector go in your direction EXCEPT the one you are in. Ever happened to you? With ETFs, you are at less risk of buying or selling short the wrong stock within a particular sector because you are essentially buying or selling short the entire sector! This means that it does not matter as much if Morgan Stanley has a big sell order in AMD because you will also have exposure to the rest of the stocks in the Semiconductor index if you buy SMH.

Better trending. ETFs chart better than individual stocks because even if one stock within the index is volatile and erratic on a particular day, the composite of associated stocks within the ETF aids in smoothing out the trend.

Fast executions. Although you can trade ETFs through a traditional stock exchange such as the NYSE or AMEX, you can also trade through ECNs such as Island, ARCA, or Redibook. This enables you to get instant executions, especially because the average daily> volume in ETFs has been steadily increasing.

Below is a chart of BBH, the HOLDR tracking stock for the Biotechnology index, overlaid with $BTK.X, which is the symbol for the Biotechnology index. Notice how closely the BBH mirrors the performance of the BTK index:

I'm excited to see the improved profitability that ETFs will bring to subscribers of The Wagner Daily. Through minimizing our overnight risk exposure, reducing erratic intraday trading activity, and lowering trading commissions, the results should speak for themselves!

Deron's Weekly Report Card

Here is a cumulative performance summary of the trades that were mentioned in The Wagner Daily for the past week of August 5 - August 9, 2002:

Number of trades targeted: 13

Number of trades triggered: 7

Number of closed winning trades and total gain: 6 trades, + 4.48 points

Number of closed losing trades and total loss: 2 trades, (1.20) points

Number of open positions and current gain/loss (based on closing prices): (none)

In case you have not already done so, you can click here to view an actual past issue of The Wagner Daily. If you would like a free trial period, just e-mail me (limit one per person).

Odds and Ends

The www.morpheustrading.com web site has been overhauled and new content is being added weekly. Subscribers to my daily report will soon have the ability to log on to the site and view each day's issue directly via the web. Also under construction is an archive of each issue of The Wagner Daily that will be free for everyone to review.

As always, thanks for spreading the word about The Wagner Weekly.

Yours in success,

Deron M. Wagner

DISCLAIMER: There is a risk for substantial losses trading securities and commodities. This material is for information purposes only and should not be construed as an offer or solicitation of an offer to buy or sell any securities. Morpheus Trading, LLC (hereinafter "The Company") is not a licensed broker, broker-dealer, market maker, investment banker, investment advisor, analyst or underwriter. This discussion contains forward-looking statements that involve risks and uncertainties. A stock's actual results could differ materially from descriptions given. The companies discussed in this report have not approved any statements made by The Company. Please consult a broker or financial planner before purchasing or selling any securities discussed in The Wagner Weekly ( hereinafter "The Newsletter"). The Company has not been compensated by any of the companies listed herein, or by their affiliates, agents, officers or employees for the preparation and distribution of any materials in The Newsletter. The Company and/or its affiliates, officers, directors and employees may buy, sell or have a position in the securities discussed in The Newsletter and may profit in the event the shares of the companies discussed in The Newsletter rise or fall in value. Past performance never guarantees future results.