Diamonds, Spiders and Cubes Explained
Investment vehicles offer great opportunities using EWI analysis
I’m constantly hearing funky new jargon on the web and in the media. What exactly do"Spiders" and"Diamonds" have to do with the stock market?
Those colorful nicknames you keep hearing about are Unit Investment Trusts. It’s a relatively new type of investment vehicle that has become very popular among investors who want their money to track a specific index. Among the ever-growing list of trusts, the most popular are the S&P’s Spiders (SPY), which track the S&P 500; Diamonds (DIA), which track the DJIA; and Cubes (QQQ), which track the NASDAQ 100. All three of these trusts are traded on the AMEX.
So what’s all the fuss?
The appeal of these index funds is that their movements are a mirror image of the underlying index and can be bought and sold like a stock. They’re also very diversified. Each vehicle is created by a trust (such as State Street Bank and Trust Company, which creates Diamonds) and can contain shares of more than 100 high-profile companies in a market.
It sounds like a mutual fund - what’s the difference?
Well, they are similar to mutual funds - with one very important difference. The value of these index funds changes throughout the day -- as opposed to the once-a-day revaluation of traditional mutual funds. This allows investors greater liquidity and convenience. So in essence, they act like a stock. Plus, investment trusts can be sold short on a downtick - a characteristic that’s really helped their popularity.
This sounds like a great opportunity for EWI subscribers.
Exactly. Since the purpose of these unit investment trusts is to offer an investment vehicle that closely mimics an underlying index, wherever the index goes, the value of your investment will follow. By using EWI’s long and short-term forecasts, you can see where the market and your money are going to be headed in advance. This is a particularly useful product for subscribers to Short Term Update and Elliott Wave Financial Forecast. When these services tell you what the indexes are likely to do, you can buy or sell these trusts accordingly. If STU says the Dow is likely to experience a significant advance, it might be time to invest in a Diamond. However, if that index is going to sink, you might want to sell. And remember - you can always sell short.
Just how closely do these products mimic the action of the index?
Because these trusts are designed to closely track their underlying index, the trust share will behave almost exactly like the market. Just look at the chart above. The top line represents the movement of the NASDAQ 100 from March 27 to April 20, the most volatile period of the year. The bottom graph is the QQQ’s during this same period. Notice how closely the two lines mirror one another even in times of intense volatility.
<ul> ~ Quelle:EWI</ul>
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