You may have heard of Exchange Traded Funds (ETFs) or SPXs and perhaps you have some in your portfolio, but not many investors realize the broad range of trading strategies these assets offer. However, after reading the trading strategies for ETFs listed below, you will be smarter in your trading and have more tools in your investment arsenal.
Investing in the Market Using ETFs
Like the market, you can use ETFs to invest in the stock market or even to play market volatility. There are ETFs for Nasdaq like QQQ. There are ETFs for S&P like the various SPDRs. There’s an ETF for Dow Jones (DIA). And for those who want to trade on market volatility, there are several ETFs and ETNs that track the Cboe Volatility Index (VIX).
Using ETFs to Get Exposure to a Specific Industry
You may not want to invest in the market as much as you want to invest in a specific industry. Do you think clean coal production is the next environmental breakthrough? Maybe a coal mining ETF is the way to go. Whether it’s finance, defense, utilities, or even technology, it’s much easier to buy an ETF for an industry rather than trying to capture the market in sector stocks.
Investing in Commodities Without Investing in Commodities
Let’s face it, you don’t have space in your basement for a barrel of oil or a crate of gold and some cattle (or maybe you do). However, you do have space in your portfolio for commodity ETFs. Without having to store cattle, you can buy a commodity ETF and gain immediate exposure to the commodities market. It’s a much easier deal, and you don’t have to water it.
Foreign ETFs Give You Access to International Markets
Investing abroad can be complex. Currency adjustments, foreign tax laws, and general challenges overseas. However, there are ETFs that make international investing much easier. There are ETFs for foreign markets, funds that are based on local currencies, emerging market ETFs, broad foreign funds, and even ETFs that track individual countries like Brazil and China. There’s no longer any reason to fear investing outside the U.S. or any other country. The world is your ETF.
Bond ETFs Are the Gift That Keeps on Giving
Bond ETFs are more appealing than most investments because they not only trade in secondary markets but can also create cash flow in your portfolio. Investing in bonds can be generally tricky. Coupon rates, default risks, duration. However, a bond ETF can alleviate some of that complexity by offering investors a pre-packaged asset that provides instant access to the bond market.
ETNs
There are classes of ETFs known as ETNs; they are exchange-traded notes. ETNs are assets issued by a major bank as senior unsecured notes – unlike ETFs that consist of securities like commodities, currencies, futures contracts, and options.
Play the Currency Market Using ETFs
Bond ETFs and ETNs are two ways to play the interest rate market, but when it comes to trading foreign interest rates, look no further than currency ETFs. Whether you want to invest in broad currency assets, a regional currency like Europe, or even a single country’s currency, ETFs have what you need… literally. Currency ETFs are a great way to hedge foreign risk, play foreign interest rates, or even invest in foreign currencies.
Playing the Downside Using ETFs
For every buy trade, there’s a sell trade on the other side. Most people associate investing with buying, but that only covers 50% of every deal. So it makes sense that there are ETFs specifically designed for bearish investors. The downside can be created by selling any ETF, but what if I told you that you could buy an ETF and have a short position? It’s true, and it’s called an inverse ETF. Perfect for investors who have restrictions on short selling but want to take a short position; they can buy an inverse ETF.
Hedging
Risks of Using ETFs
We return once again to “investing means buying.” But a large part of investing is also protecting against risks. Here, ETFs can help. Do you have a large diversified portfolio that benefits when the market rises? Protect the downside by shorting a market ETF. Want to invest in multiple oil stocks? Buy an oil ETF to protect your exposure to the upside. Do you have a long position in the index? Protect your position by shorting a core ETF.
Hedging Indices Using ETFs
I hinted at this above, but ETFs are a great way to hedge index positions. If you are long on a particular index, you can take an opposite trade to protect your risks. Some indices have multiple ETFs that track them, so opportunities can be abundant when it comes to protecting your index risk. Trade an ETF to hedge some or all of your index position or, in some cases, establish a similar position to the index using an ETF instead. After all, that’s why they were created.
Explore Your Options Using ETF Options
There are many ways to use ETF options. You can use them to hedge ETFs (and vice versa) or even the underlying index. ETF calls can be great assets to gain upside exposure without tying up a lot of capital, and options are a way to establish a short position as well. You can even use advanced ETF options strategies to take a volatility stance or simply trade based on market value. If there is an ETF that lists options, you have… options.
Play Earnings Season with ETFs
Once a year, you’ll need to prepare for earnings season. ETFs can help you with that. Whether you are using ETFs to take a long position in a promising sector, to hedge against any earnings surprises, or to play earnings volatility using ETF options, there is an earnings strategy for you. If you have upcoming earnings announcements on your securities, it’s earnings season for ETFs.
Trade ETFs that Suit Your Investment Style
Do you tend to prefer large-cap securities? Do you enjoy investing in value stocks? Regardless of your preference, there’s an ETF for you. Whether it’s growth or value or a blend, or even large, mid, or small-cap companies, there’s an ETF that fits your strategy. It’s important to be comfortable with your portfolio, and style-specific ETFs are exactly the assets that match your investment style.
Why Include ETFs in Your Trading Strategy?
I speak often about the numerous benefits of ETFs on this site. And there’s no secret that they have gained popularity in recent years. But not everyone is convinced yet. So for all the ETF traders and investors out there, why should you include ETFs in your portfolio? What makes them attractive to you?
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Source: https://www.thebalancemoney.com/etf-trading-strategies-1214934
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