Using ETFs to Gauge Market Sentiment

October 17th at 1:52pm by Tom Lydon

More analysts are tracking exchange traded fund data and trading patterns to get a feel for the overall market’s stance on risk.

WSJ.com’s MarketBeat points out that ETFs may play a role in determining market conditions, especially when ETF trading volumes are high compared to individual stocks.

Currently, daily ETF trading volumes are around 30%, and individual stocks make up 70%, according to the report.

“People want to avoid loss more than they will try to seek gains, and ETFs are living proof of that,” said a market strategist.

“Investors turn more to ETFs as a hedge when they can’t count on fundamental stock picking to generate good results,” MarketBeat reported.

“A long-only equity investor’s mandate is to find returns investing in single stocks. In a market with correlations as high as they are, it becomes more challenging to pick the winners,” Liz Myers, co-head of equity capital markets for the Americas at J.P. Morgan Chase & Co., said.

Wall Street bankers are looking to the ETF-to-stock trading ratio as a measure of investor sentiment, according to the report. With elevated market volatility, correlation in stock movements are at record levels, and the lockstep movements of the broader market makes it harder to pick individual winners and losers. [ETF Correlations Still Elevated in Headline-Driven Market]

“When correlation goes up, the differences within a sector or even between industries drop, and all things are evaluated as being the same” in terms of risk levels, Russell Investments Chief Market Strategist Steve Wood said. Trying to pick a single performing stock “is like holding a candle to the sun; you can’t see it.”

For more information on ETFs, visit our ETF 101 category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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