Tips for Trading on the BEL20
To mitigate the potential risk volatility of the Bel20, index an investor can trade an exchange traded funds strategy which is called pair trading.
Ring the Bel20
The BEL20 Stock index is a Euronext Brussels index and a high cap-weighted index comprising 20 companies. Because the Bel20 index’s components are 20 high cap stocks, the index can be quite volatile, especially as the high weighting on some stocks can cause a stock’s movement to have a large effect on the price of the index. This is especially so in the first half-hour of trading after the daily opening and during the last half hour of the day just before the trading day closes.
Compare a Bel20 index quote in the first half-hour of trading with the mid-morning price, it could be quite significant. Trading the index during these times is something that investors should avoid. Also, investors should avoid trading on the cusp of other markets in other time zones opening or closing as some companies represented in the Bel20 index are global and if their markets overlap with the European market and there is some negative or positive corporate activity it could have a short term effect on the indexes price during the initial overlap.
One of the ways to reduce volatility is to trade Exchange Traded Funds (ETF’s) on the Bel20 index. An ETF is an investment product which tracks a particular stock market index. Its intent is not to outperform the index but simply to follow it. Its stock components are exactly the same as the index it is following.
There are two reasons why you would use an ETF instead of investing directly on a particular index. Firstly, it gives you exposure to a certain market such as the Bel20 index in one single instrument, so you needn’t purchase individual equities in a particular index. An ETF is less complex, and also it is a cost-efficient instrument. Secondly, it also enables you to hedge your risk in a certain market. As the Bel20 index can be volatile and unpredictable in nature, one way to trade it with little risk is to use a strategy called ETF ‘pair trading’.
What is Pair Trading?
Pair trading has been popular in the stock market for quite some time. Traders typically match a stock long position with a stock short position. This type of strategy can be done with ETF’s to mitigate the volatility of the Bel20 index.
If you believe that the Bel20 index will gain over the short or long term, then you should buy a Bell 20 index ETF and at the same time sell an ETF that looks vulnerable to a downturn in the market and is in a completely different sector to the Bel20 index.
For example, the Bel20 index has little or no technology stocks, so you could sell short a NASDAQ index ETF, presuming of course that technology stocks are in for a downturn or another sector or part sector that you feel will take a downturn and thereby hedge your Bel20 index volatility exposure.