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ETFs: The day trader's new friend

dberman@globeandmail.com

The variety of exchange-traded funds is exploding. Turns out, so are their trading volumes.

According to research compiled by Globe Investor, the average daily volume for ETFs trading on the Toronto Stock Exchange has risen to 12.3 million shares in the first quarter of 2008, up from 3.5 million shares in the same period last year. That's a 250-per-cent increase that speaks volumes about the popularity of ETFs and what investors are using them for.

"You've seen a significant increase in demand for ETFs," said Som Seif, chief executive officer of Claymore Investments, noting that his firm's assets grew 50 per cent in the first quarter alone.

For sure, part of the reason is that more investors have grown disenchanted with mutual funds, most of which fail to keep pace with the underlying index. This underperformance may rankle when the stock market is booming, but it is really bothersome when the market turns rocky and losses mount.

However, the spike in ETF trading volumes is also related to how ETFs are being used. Since they track a basket of equities, but are bought and sold like stocks, they give investors an ideal way to move in and out of the market with lightning speed without worrying about liquidity issues.

According to Howard Atkinson, president of BetaPro Management, 60 per cent of ETF assets are controlled by institutional investors, which include hedge funds. When it comes to Horizons BetaPro funds, many of which are highly specialized ETFs, the average holding period is as low as four days - and the lower the holding period, the greater the trading volume.

The iShares S&P/TSX 60 ETF remains at the top of the list in trading volume. In the first quarter of 2008, average daily volume surpassed 3.6 million shares, up more than 150 per cent over the first quarter of 2007.

But more impressive, trading volume for the Horizons BetaPro S&P/TSX 60 Bear Plus ETF surged to 2.4 million shares a day in the first quarter, from just 178,000 last year - a 13-fold increase. The rising interest here is obvious: The Bear Plus fund rises in value if the market falls, which means that more investors are betting on a downturn in 2008.

Their growing interest in trading the Horizons BetaPro Gold Bear Plus fund, which rises in value when the price of gold falls, suggests investors are also becoming increasingly interested in timing gold's downfall.

Will trading volumes for ETFs level off soon? "I don't think we've seen the high side of volume yet," Mr. Atkinson said. "You're going to have additional products and new and creative ways of using them."

ETFs trading takes off in Canada

The number of Canadian ETFs has doubled over the past year while trading volume has more than tripled.

Top 10 traded ETFs (first quarter, 2008)Top 10 traded ETFs (first quarter, 2007)
Average Average
Namedaily volume Namedaily volume
iShares S&P/TSX 60 E.T.F.3,653,092iShares S&P/TSX 60 E.T.F.1,416,526
HBP 60 Bear+ E.T.F.2,397,574iShares S&P/TSX Energy E.T.F.381,147
HBP Glb Gold Bear+ E.T.F.975,226iShares S&P/TSX Gl Gold E.T.F.237,040
HBP 60 Bull+ E.T.F.870,168HBP 60 Bear+ E.T.F.178,042
HBP Glb Gold Bull+ E.T.F.482,862iShares S&P 500 $Cdn E.T.F.137,343
iShares S&P/TSX Energy E.T.F.467,513iShares S&P/TSX Incm Tr E.T.F.134,307
iShares S&P/TSX Gl Gold E.T.F.458,536iShares S&P/TSX Fincial E.T.F.129,852
iShares S&P/TSX Fincial E.T.F.396,521iShares MSCI EAFE $Cdn E.T.F.121,934
HBP Financials Bull+ E.T.F.261,338iShares S&P/TSX Matrl. E.T.F.110,422
HBP NYMEX Oil Bear+ E.T.F.192,823iShares Cdn Univrs Bond E.T.F.110,223
Total Canadian ETFs
March 31, 2008Dec. 31, 2007March 31, 2007
Number796139
Average daily Volume12,316,5695,918,5983,538,005
DOUGLAS COULL/THE GLOBE AND MAIL; SOURCE: GLOBEINVESTOR.COM

See David Berman's Market Blog on ReportonBusiness.com

© 2007 The Globe and Mail. All rights reserved.

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