The Wagner Weekly
August 19, 2002

Table of Contents

ETFs - A closer look
Deron's Weekly Report Card
Odds and Ends

ETFs - A Closer Look

After discussing the benefits of trading ETFs (Exchange Traded Funds) in last week's issue of The Wagner Weekly, I received a lot of feedback and interest from readers who wanted to learn more about them. So, for the next several weekly issues, I will be discussing various aspects of trading ETFs. Let's begin by taking a closer look at the various types of ETFs.

There are presently 257 ETFs trading worldwide, although American traders do not have access to all of them. The American Stock Exchange (Amex) is the pioneer of the ETF, responsible for bringing the first domestic product to market in 1993. Leading the industry in ETF listings, the Amex lists 121 ETFs to date.

The three most popular and liquid ETFs are QQQ (the Nasdaq-100 index tracking stock), SPY (the S&P 500 index tracking stock), and DIA (the Dow Jones Industrial Average index tracking stock). QQQ is so liquid that it trades an average daily volume of about 107 million shares per day, making it ideal for short-term trading. SPY trades an average of 37 million shares per day, while DIA trades over 8 million shares per day. These three ETFs provide a multitude of trading opportunities on any given day, all with lower risk than individual stocks. In addition to these three ETFs, there are 118 more domestic ETFs, which I have grouped by family below:

HOLDRS - You may think the spelling is a typo, but it is correct and is an acronym that stands for HOLding Company Depositary ReceiptS (pronounced "holder"). These securities represent ownership in the common stock or American Depositary Receipts (ADRs) of specified companies in a particular industry, sector or group. Issued by Merrill Lynch, there are currently 17 different HOLDRS. Of these, there are 6 that trade an average daily volume of at least 300,000 shares per day (based on the monthly average daily volume of the past three months). With the exception of two of them, all the HOLDRS track specific market sectors or industries. The most popular HOLDRS are SMH (Semiconductor Index), BBH (Biotechnology Index), PPH (Pharmaceutical Index), and OIH (Oil Service Index).

iShares - Issued by Barclays Global Investors, there are currently 79 different iShares. Of these, there are 9 that trade an average daily volume of at least 300,000 shares per day (based on the monthly average daily volume of the past three months). The composition of iShares consists of the following types of ETFs: industry/sector tracking, S&P/Russell (broad-based) index tracking, international equities, and the recently launched fixed-income shares. The fixed-income iShares, launched in July 2002, allow you to actively trade corporate and government bonds, just like you do with stocks. Being an equities trader, I personally am very excited to start trading these fixed-income ETFs.

SPDRS - There are currently 11 different SPDRS (pronounced "spiders") which is an acronym for Standard & Poor's Depositary Receipts. Each SPDR is either issued by State Street Securities or PDR Services, LLC. Of these, there are 6 that trade an average daily volume of at least 300,000 shares per day (based on the monthly average daily volume of the past three months). Two of the SPDRS are broad-based(SPY and MDY), while the rest track specific market sectors or industries (Select Sector SPDRS). The most popular SPDR is SPY, which trades an average daily volume of over 37 million shares and is composed of the equities in the S&P 500 index. Also popular are MDY (MidCap SPDR) and XLF (Financial Sector SPDR), each of which trade about 2 million shares per day.

Although ETFs are relatively new, they are quickly becoming the rage for traders looking for better trending, better diversified, and lower overnight risk positions. As they continue to grow in popularity, more trading opportunities will arise as average daily volume increases and new ETFs are issued. There are presently 23 ETFs with an average daily volume greater than 300,000 shares per day, enabling a wide selection of daily trading opportunities.

I am currently working on a comprehensive database of ETFs that are suitable for short-term trading. The ETFs will be grouped by type (sector tracking, broad-market tracking, international, or fixed-income) and will include data such as the individual securities that comprise each ETF. This database will be complimentary to all subscribers to The Wagner Daily and will be completed by the end of August.

Beginning on August 26, I will be closely examining a different ETF in each weekly issue of The Wagner Weekly so that you are educated as to the composition of each ETF. This will aid you in predicting the price movement of each ETF by comparing its price to the individual weighting of each security that comprises its respective sector or index. If you would like to research this information on your own, you can start by going to the American Stock Exchange web site and clicking on "ETFs." You can also go to the HOLDRS web site and the iShares web site.

Deron's Weekly Report Card

Although I have personally been trading ETFs for over six months, last week was the first week in which every trade in The Wagner Daily was an ETF. I was very pleased with the results, which I am sure will continue improving as we continually work toward perfecting our proprietary ETF scanning methods.

The most profitable trade last week was a long entry in OIH (Oil Services Index HOLDR). After getting stopped out with a loss of 1.15 points on the first entry, we re-entered OIH on the second trigger and netted 4.21 points on the re-entry. We currently have a long positions in SMH with an open profit of 1.31 points and QQQ with an open profit of 0.60. Here is a cumulative performance summary of the trades that were mentioned in The Wagner Daily for the past week of August 12 - August 16, 2002:

Number of trades targeted: 11

Number of trades triggered: 6

Number of closed winning trades and total gain: 2 trades, + 4.83 points

Number of closed losing trades and total loss: 2 trades, (2.09) points

Number of open positions and current gain/loss (based on closing prices): 2 trades, + 1.91 points

If you would like to view last Friday's issue of The Wagner Daily, click here to see it.

Odds and Ends

The www.morpheustrading.com web site has been overhauled and new educational content is being added on a regular basis. We have also registered a new domain, etftrade.com, and it will be live within the next few days. The new domain name reflects our mission to become "The Leader In ETF Trading." 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.

If you would like a free trial to The Wagner Daily and have not yet received one, just send me an e-mail.

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.