Wednesday, March 05, 2008

Deconstructing the XLK

I received some comments about the XLK as a possible Qs proxy, so let's take a look at the Spyder's Tech sector ETF. Performance chart shown above. . . somewhat interesting that volume has not picked up as dramatically as the other ETFs profiled last week, or the Qs. Price is currently riding below the 20DSMA, so no apparent edge up or down relative to the Qs.
XLK components are shown above and although there's considerable overlap between the names, the proportions are significantly different, with the XLK dominated by MSFT, T and CSCO. The other difference with the XLK is that Telecom accounts for 18% of the net assets, while that number is less than 2% for the Qs.

Above are the daily, weekly and monthly 3 linear regression studies (30,11,3) of the XLK. The "ledge" formation is evident in the weekly and monthly charts. On the daily, the XLKs currently looks overbought as price rides the upper channel of the LR30. reversion to the mean would bring it to 21. (It hit a daily low of 19.76 on Jan 22 and 21.31 on Jan 23, so its seen these numbers before)
The ETF itself trades in penny spreads on an average of 4M shares daily. There appears to be a lot of spread positions out there, BUT for active option traders the XLKs offer dismal open interest and even worse, the Bid/Ask spreads are .10-.40, making them basically untradable short term. The daily option volume is also dismal. . . today, for example, shows no volume in the near calls and 20 contracts in the puts, again making the options unattractive and untradable for the average retail trader.
Short interest, on the other hand, clearly shows some interest and although the XLK does pay a dividend, (bad if you're short), it's only .19 so the liability is limited (the Qs pay no dividend). This short interest chart looks a lot different than the Qs, but as discussed earlier, that may be because traders are opting to put money into the QIDs, gaining x2 leverage to the downside in lieu of simple short positions.
Finally, here's a comparison chart of the Qs versus the XLK, demonstrating the relative strength of the Qs. Another reason not to get too excited about dumping money into the XLK. I'm sure there are arguments for investing the the XLK, but based on this cursory look today, they are not readily apparent. Got any thoughts? Send them in.

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