As part of our continuing analysis of various ETFs, we chose OIH for analysis this week because it is one of the ETFs we are trading this week due to expected volatility over Middle East tensions. Since we cover a different ETF each week, you can view earlier parts of this thread to read about ETFs previously discussed. The purpose of this analysis is to enable you to understand the underlying components that comprise each ETF, as well as the bearing each respective stock has on the associated ETF.
OIH is the ticker symbol for Oil Service HOLDRS Trust and is one of seventeen different HOLDRS issued by Merrill Lynch. In addition, OIH is one of only six HOLDRS that trades an average daily volume of more than 300,000 shares. As explained in the August 19 issue, HOLDRS is an acronym that stands for HOLding Company Depositary ReceiptS (pronounced "holders"). These securities represent ownership in the common stock or American Depositary Receipts (ADRs) of specified companies in a particular industry, sector or group. A complete list of HOLDRS can be found by going to the HOLDRS web site.
OIH is comprised of individual stocks represented in the Oil Service Index, which trades under the ticker symbol OSX. The index is comprised of companies whose primary source of revenues is derived from oil-related services such as drilling and drilling machinery. Prior to the inception of the Oil Service HOLDRS ETF, we frequently traded a basket of oil service stocks including Halliburton, Schlumberger, Diamond Offshore, and Baker Hughes. However, since the inception of OIH, we have been able to realize the same benefits of diversification on an even broader basis with a deep savings in trading commissions. It is also much easier to manage one position than a basket of 5 or 6 positions. Since OIH is a composite of many different stocks, it trends better intraday, making technical analysis easier and more accurate. We simply base our OIH trade entries on the movement of its respective sector index, OSX.
Here is detailed look at the composition of OIH. An explanation of how to interpret this data is listed below the chart:
Company and Ticker: Pretty self-explanatory. This represents the name of the company and associated ticker symbol for each individual stock that comprises OIH.
Shares: This is the quantity of shares of each individual stock that comprise one round-lot order of OIH. A round-lot order is equal to exactly 100 shares. For example, the total of 205 shares of stock that you see listed above equals the exact number of shares that you receive by buying 100 shares of OIH. By purchasing 100 shares of OIH, you are buying 22 shares of Halliburton (HAL), as well as the specified number of shares in each of the other 16 stocks. By owning OIH, you also will receive dividends, when issued, from any associated stocks. Furthermore, HOLDRS can actually be converted to the underlying quantity of stocks by requesting your broker to do so.
Price: Simply the last price of each stock that is listed, based on the closing prices of Monday, September 16.
Market value: This is found by multiplying the number of shares of each stock times the last closing price. The sum of the portfolio's market value will always equal the current price of 100 shares of OIH. As of today's close, the sum of the market value was $5,215.68. Taking that number and dividing by 100 shares equals the current price of one share of OIH. Here is how we derive the price of OIH: $5216 (market value) / 100 (one round lot of shares) = $52.16 per share of OIH. Notice that the closing price of OIH today was $52.34, within 18 cents of the actual value of the components. Sometimes there are arbitrage opportunities in instances when the value of the ETF strays too far away from the value of the underlying securities. However, it is difficult to arbitrage an ETF such as OIH because of the wide spread that is usually present; it works much better as a multi-day swing trade.
Percent Weight: Represents the current percentage of the entire portfolio that is represented by that one stock. This percentage will constantly be changing as the market value of each individual stock changes. However, the number of shares of each stock does not change. For example, if Tidewater had a really strong up day but the rest of the Oil Service stocks did not rally much, it would result in an increase in the percentage weighting of Tidewater within the portfolio.
One strategy we have found to be effective is to set up a group of quotes with your data provider that lists each stock within OIH. As you are trading OIH, you will find that watching the performance of the individual stocks enables you to get a better idea of the relative strength or weakness of OIH, especially when the price of one of the stocks in OIH is being heavily affected by news. Below is a screenshot of a market minder that we have set up to follow OIH. Notice how we have the stocks sorted by percentage change so that we can quickly see who the best and worst performers are within OIH. We can then compare their performance with their percentage weighting to predict short-term price movement of OIH in relation to the OSX index:
Notice that HC was the only stock in OIH that closed severely down on the day. However, because its weighting in OIH is so small (less than 1%), it did not affect the overall price of OIH very much. It is helpful to have printed copies of the underlying components and a market minder following each sector because it enables you to analyze the importance of price divergence of particular stocks throughout the day. Once you begin to memorize the individual components and weightings of each stock, you will find significant improvements in your profitability.
