“Hope you are well. Could you please comment on the pullback in Japan, with reference to the Nikkei, Topix, Mothers, and Jasdaq indices? Could you also please comment on the Japanese real estate companies?
“Additionally, I had a question about the use of technical analysis when analyzing ETFs. Do the same principles as taught at TCS apply to ETFs? I am a bit confused here, as I understand that the unit price of an ETF is supposed to reflect the aggregate share prices of the companies composing the ETF. Are there any other limitations when technically analyzing ETFs I should be aware of, such as liquidity, as many ETFs have market caps in the tens of millions USD?
“Thanks in advance for addressing my questions.”
Eoin Treacy's view Thank you for your kind words. ETFs have evolved considerably over the last decade not least because they are so accessible and offer such enormous coverage of previously inaccessible sectors and markets. However, it is also worth considering that by definition ETFs are derivatives and are therefore dependent on the liquidity and individual characteristics of the instruments they attempt to mirror.
Small illiquid instruments regardless of whether they are ETFs represent a challenge when one attempts to exit. In such circumstances it is often necessary to attempt to anticipate peaks rather than waiting for confirmation. The basic question I would ask myself is whether a small illiquid ETF is capable of fulfilling its role of tracking an index? If there is any doubt about how easy it will eventually be to sell, then position sizes need to be tailored accordingly.
Our brand of analysis will work best in liquid markets where the greatest difference between supply and demand exists.