Wednesday, July 25, 2007

Can Online Discussion be used to Predict Interest in Exchange Traded Funds (ETF's)?

A co-worker of mine came to me a few days ago and asked whether exchange traded fund (ETF) discussion has trended down and if so, would that be a leading indicator that ETF popularity will be decreasing. Therefore, I set up a small project to see whether a correlation between online buzz and trading volume existed. The results are very surprising.

First I wanted to see how online discussion about ETF's in general was trending. Discussion rose significantly from October 2006 to April 2007. However, discussion started to level off, then pick up again in early July 2007.

Second, I wanted to see how trading volume for specific ETF's trended over time compared to online discussion. Therefore, I looked at two ETF's, PowerShares Gldn Dragon Halter USX China (PGJ) and iShares MSCI Malaysia Index (EWM). Interestingly, there seems to be some correlation between online discussion and trading volume for ETF's. PGJ's average trading volume has a .79 correlation with online discussion about the fund while EWM's average trading volume has a correlation of .84 with online discussion. Overall, these are rather impressive.

Now I am not a finance guru by any stretch of the imagination. However, I do think this analysis provides some insight. Discussion volume and trading volume for both ETF's peak between January and March. Interestingly, share prices for both began to flatten.

I am not saying that online discussion should be used when evaluating whether to purchase an ETF, but it does warrant some attention. Typically, higher trading volumes indicate that more investors are buying (stock price goes up) or selling (stock price goes down) a particular stock.

I have yet to determine the cause and effect relationship between online buzz and trading volume for ETF's. However, I'm sure it is possible if I am able to review "real time" information about how people are talking. For example, Apple shares plunged $8.00 on Tuesday, July 24, 2007 when the first wave of "activation" numbers came through. I could have speculated increased trading volume would follow if consumers were saying things like "I'm going to be selling my Apple stock since iPhone sales were disappointing." In contrast, increases in trading volume may cause online discussion if investors discuss the transaction after the fact (i.e. "I sold my Apple stock today since iPhone sales were lower than expected").

* Average trading volume information came from Yahoo finance historical information for EWM and PGJ.

On a separate note, I'm sorry for not leaving a post in a while. I have been very busy trying to complete the purchase of my first home. I close on August 21, 2007. Feel free to send an e-mail to or leave a comment regarding anything I've posted today or in the past.

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