How Investor Get Diversification
By Anthony Green
There are many different products that help the investor get diversification easily and quickly when the market and sector indicators so dictate. Such products include the SPDRs (SPY), Nasdaq 100 shares (QQQ), and many Select Sector SPDRs, Merrill Lynch Sector Holders, and iShares.
Over the past few years, the different exchanges have devised new products that allow investors to gain diversification with the purchase of one security. As long as you understand the weighting implications of such products, these can be very efficient ways to play the broader market, or pinpoint a specific sector. For example, instead of having to buy all 500 stocks in the S&P 500 (and weighting them accordingly), you can, in essence, own the S&P 500 with one purchase using the S&P 500 Depositary Receipts, better known as the SPDRs (SPY). There is a similar product available to trade in the OTC market, that being the Nasdaq 100 Shares (QQQ).
These same types of products exist for the sectors. This is a newer area of development for the exchanges, with some sectors still not covered. But each day more sector products are introduced. There are a couple of choices for sector (diversification) securities. The AMEX has Select SPDRs (nine in all), which are similar to its SPYs, but are designed to cover a broad industry group, such as financials (XLF), or technology (XLK). Merrill Lynch has come out with what it calls HOLDRs, an example being its Biotech HOLDRs (BBH). These HOLDRs cover more specific sectors or subsectors.
Also, Barclays has introduced Shares. Both Barclays and Merrill Lynch have stated that they will continue to introduce new exchange-traded funds in the future in an effort to cover more and more sectors.
Regardless, whether it is the QQQ or the BBH, these investment vehicles allow you to gain market or sector diversification with a single transaction that otherwise would be difficult to achieve through outright ownership of all the underlying stocks. You are able to buy or sell them just like you would a stock, and since it is one easy transaction, it is a low-cost way to get diversified in the market or specific sector.
With the advent of these products, it becomes very easy to enter or exit the market or specific sector when the market (sector) indicators dictate. Using the bullish percent concept and sector relative strength tools, you can determine when to reenter the market or rotate to a given sector. So, for example, if the NYSE Bullish Percent reverses up from low levels, giving a buy signal, you can easily enter the market and gain instant diversification by buying the SPYs.
Or let�s say the drug sector bullish percent reverses up from low levels to give a buy signal and the relative strength for the group looks equally good. You can buy the Merrill Lynch Pharmaceutical HOLDRs (PPH) to gain instant diversification with one easy purchase. One note with respect to the HOLDRs is that they must be bought in lots of 100 shares. Given how quickly the markets tend to move now, being able to get into the market or a given sector easily is of paramount importance. The vehicles discussed in this section provide that flexibility and can give you immediate diversification at the same time.
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