I have for a number of years traded the popular ETF's and make a reasonable living from it. At times I would hear traders remarking that buyers at a support level would drive the SPY or QQQ back up or vice versa sellers would dominate and drive it down. It confused me because I thought that the SPY is based on the value of 500 stocks that had their own price level and therefore the price of the individual stocks and the action of traders trading those stocks were driving the prices. I asked about it on a forum and got the answer that this was not the case. That it was the combined action of the futures and ETF traders that were driving the price action, with arbitrators trading the difference away from the actual stocks. I then tried to find a definite source of this info explaining it in terms that I could understand and found nothing that would satisfy my curiosity. It does not make any difference in my trading, I trade what I see, but it does leave me feeling somewhat ignorant. I would be grateful if I was shown a source that explains it in somewhat simple but accurate terms.
Does the tail wag the dog??
- Thread starter Lutra
- Start date
It's both. I don't know what the flows are like but before ETFs existed it was just individual stocks driving the flow. Since ETFs are now plentiful and some traders, and in fact fund managers, own the ETFs rather than the individual stocks for diversity, then if someone buys a certain amount of shares of the ETF, the ETF is in turn investing that in weighted proportions of the individual stocks.
In a simplistic world, imagine if everyone could only buy the ETF but the ETF then bought the underlying stocks. Everything would move in the same amount (weight adjusted). Clearly this does not happen but there is much more correlation now then there used to be decades back
In a simplistic world, imagine if everyone could only buy the ETF but the ETF then bought the underlying stocks. Everything would move in the same amount (weight adjusted). Clearly this does not happen but there is much more correlation now then there used to be decades back
sure
Thank you, "It's both" helps to envisage the process.
Thank you
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Good thing we dont live in a simple world.NasdaQQQ is correlated to itself. I like what a profitable dow derivatives trader said dow is correlated to itself-------i'll take his word for it;seldom trade a dow derivative.
NOT sure if any bought qqq in 1999/just because msft was trending super--I doubt it/but i'm not a mind reader...……………………………..
