By Philip Moskie
Exchange-traded funds (ETFs) can be an effective tool for traders looking to navigate challenging market conditions. By investing in ETFs that focus on specific sectors of the market, traders can potentially insulate themselves from broad market downturns and identify opportunities for outperformance. The use of artificial intelligence (AI) technology, such as ChatGPT, can facilitate the process of implementing this strategy and increase the chances of success for traders.
Introduction
In this article, we will discuss how an investor can utilize ChatGPT, a form of artificial intelligence (AI) technology, to assist with trading ETFs. First, we will delve into the concept of sector trading and the potential benefits of this approach, particularly in challenging market conditions. We will then provide a detailed overview of the step-by-step process we used to effectively utilize ChatGPT as a tool for sector trading. It is important to note that while ChatGPT can be a valuable resource for investors, it also has certain limitations that should be taken into consideration. This article aims to provide a comprehensive guide for investors looking to use ChatGPT to trade ETFs.
What is an ETF?
ETF is an acronym for the name “exchange-traded fund”. It is a type of investment product that tracks with a particular asset or group of assets. ETFs allow investors to diversify their holdings across a wide range of investments with great ease as they are traded on stock exchanges like individual stocks.
There are many different types of ETFs, each with its own unique investment objective. Some ETFs track specific indices, such as the S&P 500 or the NASDAQ, while others focus on a particular sector or asset class, such as technology stocks or commodities.
What is Sector Trading?
Stock sector trading involves buying and selling stocks within a particular sector of the economy. A sector is a non-related group of companies that operate within a specific industry or market. For example, the technology sector includes companies that produce and sell technology products and services, such as computer hardware and software, telecommunications equipment, and internet services.
Traders who focus on stock sector trading aim to profit from changes in the performance of a particular sector. One way this can be done is by identifying which sectors should do better in changing market conditions. For example, we are currently in a bear market. Sector traders should be looking at stocks in so called “defensive industries”. By matching the sector with the current market conditions traders can limit risk and look for potential upside trades more easily.
Stock sector trading can be a useful way to diversify a portfolio, as it allows traders to focus on specific areas of the market rather than trying to trade individual stocks. It can also be a way to capitalize on market trends and changes in the economy.
ETF Trading
If you are trying to use sector trading to help you, you must at some point consider using ETFs. One of the conveniences that ETFs provide is that they have defined the sector and what stocks are included in that sector. This would be very difficult for an individual investor to do on their own.
By giving us a benchmark equity that represents the entire group against, an ETF allows us to easily identify strength and/or weakness in the stocks that make up that group.
So how did we go about asking ChatGPT to help us in our trading? Here are the steps
Step 1: Generate a list of types of ETFs
The first thing we asked ChatGPT to do for us is to generate a list of the various types of ETFs so we can understand the options we have. We asked it to generate a list of the top 10 types and here is what it gave us:
| ETF Type | Description |
| Index ETFs | These ETFs track a particular index, such as the S&P 500 or the NASDAQ. |
| Sector ETFs | These ETFs focus on a particular sector of the economy, such as technology, healthcare, or financials. |
| International ETFs | These ETFs invest in companies located outside of the United States. |
| Emerging Markets ETFs | These ETFs invest in the stocks of companies located in emerging markets, such as China, India, and Brazil. |
| Bond ETFs | These ETFs invest in bonds issued by governments, municipalities, or corporations. |
| Commodity ETFs | These ETFs invest in physical commodities, such as gold, oil, or agricultural products. |
| Real Estate ETFs | These ETFs invest in real estate properties or real estate-related securities. |
| Inverse ETFs | These ETFs aim to profit from market declines by taking short positions in various assets. |
| Leveraged ETFs | These ETFs use financial instruments such as derivatives to amplify the returns of an underlying asset. |
| Actively Managed ETFs | These ETFs are managed by a team of professional investors who make active decisions about which assets to buy and sell. |
Step 2: Pick a specific ETF
So for the sake of writing this article we decided to look at Sector ETFs. So, we asked ChatGPT to generate a list of specific Sector ETFs and here is what it gave us:
| Name | Symbol | Description |
| Consumer Staples Select Sector SPDR Fund | XLP | This ETF invests in companies that produce and sell essential goods, such as food, beverages, household products, and tobacco. |
| Energy Select Sector SPDR Fund | XLE | This ETF invests in companies involved in the exploration, production, and distribution of energy, such as oil, gas, and renewable energy. |
| Financial Select Sector SPDR Fund | XLF | This ETF invests in banks, insurance companies, and other financial services firms. |
| Health Care Select Sector SPDR Fund | XLV | This ETF invests in companies in the healthcare industry, including pharmaceuticals, medical devices, and healthcare services. |
| Industrials Select Sector SPDR Fund | XLI | This ETF invests in companies that produce and sell goods and services related to industry and infrastructure, such as aerospace, defense, and construction. |
| Information Technology Select Sector SPDR Fund | XLK | This ETF invests in companies involved in the technology sector, including hardware, software, and internet-based businesses. |
| Materials Select Sector SPDR Fund | XLB | This ETF invests in companies that produce and sell raw materials, such as chemicals, metals, and construction materials. |
| Real Estate Select Sector SPDR Fund | XLRE | This ETF invests in real estate investment trusts (REITs) and other real estate-related securities. |
| Utilities Select Sector SPDR Fund | XLU | This ETF invests in companies involved in the production, distribution, and transmission of electricity and natural gas, as well as water and other utility services. |
Step 3: Dissect the ETF
We then asked ChatGPT to give us the component stocks for a specific sector. We asked it to show us the components of XLP the consumer staples ETF. Here is what it gave us:
Nothing! Since ChatGPT cannot search the internet, it could not give us the exact list. So, we had to find the list ourselves. We were able to get a list of the top 10 components of XLP from Marketwatch. Here is what it looked like:
| Stock Name | Ticker | Industry | PE Ratio |
|---|---|---|---|
| NRG Energy Inc. | NRG | Utilities | 22.34 |
| SVB Financial Group | SIVB | Financials | 10.89 |
| Moderna Inc. | MRNA | Healthcare | 14.86 |
| Qorvo Inc. | QRVO | Information Technology | 24.92 |
| MetLife Inc. | MET | Financials | 9.53 |
| D.R. Horton Inc. | DHI | Consumer Discretionary | 10.83 |
| Hologic Inc. | HOLX | Healthcare | 18.23 |
| Qualcomm Inc. | QCOM | Information Technology | 22.23 |
| Generac Holdings Inc. | GNRC | Industrials | 22.37 |
| Teradyne Inc. | TER | Information Technology | 31.68 |
Step 4: An effective trading strategy
The question is what can we do with this? Well, here is an effective strategy for using the XLP sector to trade. You create a watch list using your favorite stock tracking site. Put XLP at the top of the list and then add as many component companies as you like (see below)
| Stock | Symbol | Monthly Price Change |
| XLP Holdings ETF | XLP | -5% |
| Proctor & Gamble | PG | -1% |
| PepsiCo | PEP | -2% |
| Coca-Cola | KO | -.05% |
| Costco | COST | -2% |
| Walmart | WMT | +3% |
(This is a fictitious example and not real market numbers)
To implement this trading strategy, we will use the Consumer Staples Select Sector SPDR Fund (XLP) as a benchmark to compare against individual stocks within the ETF. This will allow us to measure their relative strength or weakness. In this fictitious example, we have noticed that XLP is down 5% for the month.
Upon analyzing the components of XLP, we have observed that most of the stocks are also down, which is reflected in the price of the ETF. However, we have also identified one stock, Walmart, which is up 3% on the month. This indicates that Walmart is showing “relative strength” compared to the other stocks in the consumer staples sector. If we start building a position in Walmart, it should go down less than the rest of the stocks in the ETF. This allows us to effectively average our position and get ready for the next rally. There is a high probability that when XLP starts another rally, Walmart will outperform the other stocks in this sector and the market in general.
Key Points to remember
- ChatGPT has limitation that you must consider when using it for trading
- Sector trading using ETFs can be very effective
- Use the EFT to access that strength or weakness of your target stocks
- Build positions on market pull backs in stocks with strong relative strength
Conclusion
In this article, we have examined the potential uses of ChatGPT, an artificial intelligence (AI) tool, in trading. We highlighted that ChatGPT has certain limitations, including its inability to search the internet, perform calculations, or work with data sets past 2021. Despite these limitations, we demonstrated how ChatGPT can be used to identify specific types of ETFs for trading purposes and to obtain information about the components of these ETFs. We also presented a trading strategy that utilizes this information to enhance trading effectiveness. Overall, we have explored how ChatGPT can be utilized as a valuable resource for traders.