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ETF Trading Strategies

03/24/2020

ETF Trading Strategies You Should Know

Why pick one when you can pick them all? That’s the thinking that goes into one of the most popular investment products of the day: exchange-traded funds, otherwise known as ETFs. Ever since SPY hit the market in the ‘90s, investors have flocked to ETFs as a way to gain market exposure while minimizing costs.

Understanding the peculiarities of ETFs is only the first step toward ETF investing. Once you decide ETFs could help you achieve your investment goals, you’ve got to decide how they fit into your overall investment strategy. These are personal decisions you’ll have to make, but if you need help getting started, there are a few basic strategies that you can use as a framework for your investing.

What To Know Before Trading ETFs

As with any investment product, it’s important to fully understand what you’re buying before you place a trade order. Put simply, most ETFs give investors exposure to bundles of stocks that are designed to replicate an underlying index.

The first ETF created, SPY, tracks the S&P 500. Every share of SPY gives investors a fractional share of all the underlying stocks that are included in the S&P 500. It remains one of the most popular ETFs today because it gives investors the opportunity to instantly buy into broad swaths of the economy without having to spend thousands of dollars at a time.

There’s an ETF for every major index, such as the Dow Jones, Nasdaq, and S&P 500. ETFs can also be designed to track sectors. In those cases, the ETF managers determine an underlying index that tracks the sector. Just because two ETFs track the same thing, they may not track it the same way, so take the time to understand the underlying index before you buy an ETF.

Determine Your Risk Tolerance

Just because ETFs are more diversified than individual stocks, that doesn’t mean there isn’t risk involved. Depending on the ETFs you choose, the associated risk level can vary from conservative to extremely aggressive.

That’s why it’s important to examine both your finances and behavior before considering any specific trades. Consider this: the market suddenly experiences a significant decline. In just two days, your account loses 10% of its value. What do you do? Do you sell to prevent further losses? Do you hold tight and wait for the market to bounce back? Or do you try to capitalize on the downturn by buying more shares?

Your behavior in those kinds of situations can give you insight into what kind of ETFs are right for you. If your priority is avoiding sudden losses, leaning towards a more conservative bond ETF strategy may be more suited for you. If you enjoy taking big risks in search of a massive payout, you may be drawn toward aggressive timing strategies.

Choosing A Platform

Choosing the best platform for your trading and research is another personal decision you’ll have to make. Look for a platform with an intuitive layout that’s easy to use, but don’t forget to keep research features in mind.

For example, avid smartphone users can make use of Webull’s mobile app to trade with taps and swipes rather than clicks and scrolls. On the other hand, if you find yourself continually opening new browser tabs to dive further into the research, Webull’s web browser app turns any desktop into a financial research powerhouse.

Finding the best platform for ETF trading is similar to finding the best platform for stock trading, but there are some differences. You’ll want your platform to make it easy to find data like expense ratios and holdings, which don’t come into play for stock traders.

Goals

Just as important as assessing your risk tolerance is assessing your investment goals. Ask yourself what you want to accomplish with your investments and the timeframe in which you hope to accomplish it. Long-term wealth growth is typically accomplished through stock investments. Short-term inflation protection is typically accomplished through treasury bonds.

The experienced investors don’t seek out any single goal too aggressively. They diversify their investments and hedge their bets to enjoy the benefits of multiple strategies without taking on too much risk in any specific area.

ETF Trading Strategies for Beginners

ETFs are an easy way to dip your toes into the investing waters, and certain ETF trading strategies can increase your odds of success. If you aren’t quite confident enough to put down real money, you can use Webull’s ETF simulator to make hypothetical trades and learn about the market risk-free.

Ease Into Risk with Bond ETFs

No one likes opening up their trading app and seeing their accounts in the red. If you’re brand new to investing, and a major downturn hits right after you start, you may be discouraged by quick losses. You can ease into the risk by putting a significant chunk of your portfolio in bond ETFs. Bond prices do go up and down, but they usually move in smaller increments than stocks.

Enjoy Steady Income with Dividend Stocks

Stock prices fluctuate, but dividends are dependable — if you know the right stocks to buy. Dividend ETFs make it easy to seek out this steady income stream. Those dividend payments are a nice way to bolster your cash during your initial months of trading, and if you reinvest them over the years, your gains will multiply.

There’s a fair amount of variety among dividend indexes, so you’ll have to decide where you want to apply your dividend strategy. You could focus on high-dividend Dow stocks, for example, or you could focus on high-dividend financial stocks.

Invest in What You Care About with ESG ETFs

If you aren’t sure whether investing is right for you or not, putting your money toward causes you care about might help keep you engaged. “Environmental, Social, and Governance” ETFs are an example of what’s sometimes referred to as “sustainable” or “socially responsible” investing strategies. These products aim to reflect values in investment choices, and they vary widely in purpose and scope.

An ESG ETF is one of the broader options for this strategy. Companies are scored on a rubric that includes aspects like pollution, working conditions, and financial transparency. The better the company scores, the more shares are included in the ETF.

One trade-off with this strategy is relatively higher fees. It takes more effort to screen companies for their ESG impact, and that comes with extra costs.

Best Long Term ETF Strategies

The longer your timeline, the more risk you can take. If you know you can leave your money in the market for decades, use these strategies to seek long-term wealth growth.

Invest in the Entire Market with Index ETFs

Over time, individual investors hardly ever beat the overall market. If you know you won’t touch the money for decades, market index ETFs can be a great place to put your cash. Common indexes to track with this strategy include major American exchanges like the Dow, Nasdaq, and S&P 500.

Find Opportunities with Value ETFs

Successful investors may not enjoy much celebrity, but the few names that have found widespread recognition have something in common: value investing. Benjamin Graham, Warren Buffett, Michael Burry — they’re all examples of value investors. That means they specialize in seeking out stocks that are currently trading below what they’re worth.

This strategy works best on longer timelines because the stocks could be volatile in the near-term. Value investing requires investors to take some risk and wait long enough for the stocks to reach their intrinsic value.

Go Global with International ETFs

Diversification doesn’t have to just be a balance between stocks and bonds. You can throw multiple countries into the mix by investing in international ETFs. Pick an area of focus, such as Asia or Europe, or invest around the world with a global index like the MSCI World Index. This can be a risky strategy — it’s hard enough to track market news and make timing decisions in just one country — so it helps to have a longer timeline.

Advanced ETF Strategies

All of the ETFs covered so far are relatively safe investments that would fit into most investors’ profiles. But for those who are willing to take on lots of risk in search of even more reward, the ETF trading strategies below could be just what you’re looking for.

Unlike standard index ETFs, which contain a bundle of stocks, these ETFs may contain more complex financial products such as futures or options. Another difference with these ETFs: they aren’t designed to be held long-term. Rather, these products fall under the umbrella of ETF day trading strategies and short-term investments. Only experienced traders with a keen sense of market timing should consider these ETFs.

Bet Against the Market with Inverse ETFs

If your research has led you to believe the market is about to take a dive, you can try to profit off the downturn by buying inverse ETFs. Unlike standard ETFs, which seek to replicate the performance of an underlying index, an inverse ETF essentially seeks to short the index. If you like the convenience of ETF trading but want to replicate the performance of short selling and options trading, then inverse ETFs will fit into your portfolio.

Seek Multiples with Leveraged ETFs

Leveraged ETFs are the manifestation of high-risk/high-reward mentality. These bundles of futures, stocks, and options seek multiples on the performance of an underlying index. For example, a leveraged S&P ETF might try to double the performance of the S&P 500. This is a risky strategy because downturns are multiplied as well, so if you don’t time your buys perfectly, you could end up experiencing huge losses.

Trade the Mayhem with Volatility ETFs

Maybe you don’t know whether markets are going up or down tomorrow, but you know they’re going to swing hard. As trading gets choppy, the CBOE Volatility Index (VIX) increases. Volatility ETFs hold securities that aim to replicate the rise in the VIX, but the VIX isn’t a standard stock index, and ETFs haven’t been as successful in replicating its performance. That’s why these are short-term investments. Remember to sell the ETF before things start to calm down, or you could easily end up in the red.

Pick and Choose Strategies to Fit Your Goals

Now that you have an overview of your options for ETF trading, pick and choose elements that you think will fit into your overall investment goals. When you think you know which strategies you’ll use, pick a variety of ETFs that fit into that strategy, then research, research, research. Compare their holdings, their expense ratios, and their historical performance. Once you feel comfortable with your decisions, place an order and add some ETFs to your portfolio.

source: https://www.webull.com/blog/29-ETF-Trading-Strategies