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Smart ETF trading strategies that you can follow

January 14th 2013

Exchange traded funds which are popularly known as ETFs, are smart investment funds which are traded on the stock exchanges, like the stocks. ETF portfolio may include different assets class such as stocks, commodities or bonds. Generally, the ETFs track indexes such as the MSCI EAFE or S&P 500. The ETFs are indeed very much attractive investment options because of their low costs, tax-efficiency and stock-like features. ETFs replicate an underlying index and its purpose is not to outperform the index, but rather to mimic the index. The main aim of an ETF is to fetch the same return on investment (ROI) like the correlating index.

At the time of buying or selling a stock, you base your transaction on the predicted performance of one particular company. Again, at the time of buying or selling an ETF, you base your transaction on the expected performance of multiple companies. Like the equities and indexes, ETFs are traded on an exchange and during market hours.

You might have heard about ETFs and many of you have even included ETFs in your portfolios. However, many of you are not aware of different ETF trading strategies.

• Invest in the market with ETFs

Like an index, you can use ETFs to invest in the stock market period and even can play with market volatility. The QQQQ replicates NASDAQ, SPDR replicates S&P. The Dow Jones ETF is known as DIA. Apart from these, there are many more ETFs waiting for you.

• Industry exposure

Certain industries may show high potential for growth. You can purchase industry ETFs that replicate the indexes of those industries. This allows an investor exposure to an industry.

• Diversification

Investing in ETFs offers the investors not only to diversify across major asset classes, such as US equity, foreign equity and fixed income, but also to diversify into investments that have relatively low correlation with major asset classes. This includes commodities, emerging markets, real estate, small cap stocks and others.

• International exposure

Investing in foreign equities is very much complicated. While investing in foreign equities, you need to look after certain things such as currency adjustments, foreign tax laws and other general overseas challenges. However, some ETFs offer you the chance of international investing. Some ETFs are there which track individual countries such as Brazil and China.

• Exposure to commodities

ETFs offer you wonderful chance to expose yourself to commodities market. It does not require you to directly hold commodities. But by holding ETFs you can get instant exposure to commodities.

• Hedging

Some ETFs offer excellent chance of hedging. Investors willing to hedge against a decline in the market can invest in inverse ETFs or leveraged inverse ETFs. The main feature of the inverse ETFs is that it rises when the market actually falls. If you are worried about rising inflation, you can hedge by investing in inflation-protected bond ETFs. Currency ETFs offer you the chance to hedge against currency fluctuation.

• Market analysis

After carefully analyzing the market, an investor can take out various ETF trading strategies. If you are bullish about the overall market but bearish about any particular sector, they you can buy and sell ETFs accordingly. In this situation, you can but an ETF which tracks the overall market and sell the ETF of the sector which is likely to under perform.

ETFs are excellent investment avenues available to you. Because of its numerous benefits, these are increasingly being opted for by the investors.

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