Investing in Exchange-Traded Funds during Economic Sensitive Times
The world is living in a state of volatility: there are concerns about climate change and weather patterns, viruses are spreading globally, and political relations are constantly fluctuating. Economies, and therefore stock markets, feel the effects of these fluctuations, leading investors to be uncertain about how to move forward in conditions of uncertainty that lead to market volatility. Exchange-traded funds offer some ways to continue earning and reduce the risks of severe volatility during economically sensitive times.
Limit Orders
One option available to investors is to use limit orders instead of market orders. A market order places a buy action at the next best price. The risk in this technique is that the best buy price may be a price you cannot afford. Similarly, the best sell price may be a price that costs you significantly.
Limit orders set high and low prices on the assets you are trading, allowing you to reduce risk by setting a maximum buying or selling price you can afford financially.
Avoid Opening and Closing Trades
Prices fluctuate when the market opens and closes. It is generally known that these times experience significant volatility as investors anticipate what may happen based on events during the trading session or developments overnight.
You can reduce risk by waiting to trade until an hour after the market opens to allow price fluctuations to settle, and stopping trading an hour before the market closes to allow for fluctuations at the end of the day without getting involved.
If you place orders at the end of the session, and something occurs that changes the price of the selected purchases, you may end up paying more than you expected or gathering significantly less on the trades that occurred at the end of the session.
Premium and Discount Prices
You should trade according to premium and discount prices. Exchange-traded funds trade at a premium – when the market price is higher than the intraday net asset value (iNAV) – or at a discount – when the market price is lower than the iNAV.
Understanding the intrinsic net asset value of a security can help you avoid purchasing at a premium or selling at a discount without realizing it. Exchange-traded funds are composed of securities based on other assets; the prices of those underlying assets may differ from the prices reflected by the exchange-traded funds.
Investors should know the underlying assets that the exchange-traded funds depend on and track the prices and performance of those assets to understand the net asset value (NAV) of the exchange-traded funds. This can also lead to using exchange-traded funds as a tool for price discovery by market makers (institutions that provide bid and ask prices on stocks throughout the trading session).
How Investors Generate Income from Their Investments in Exchange-Traded Funds
Profit from exchange-traded funds fundamentally relies on the same methods of generating profit from mutual fund investments, as they operate almost identically. However, the main difference is that exchange-traded funds are actively traded at intermittent times during the trading session, while mutual funds are traded at the end of the trading session.
The price fluctuations of exchange-traded funds will be monitored by the trader, who will choose the price points at which they wish to buy and sell. The trader sets criteria on specific trades they select using limit orders or market orders.
The way to make money from exchange-traded funds depends on the type of investments they contain. Exchange-traded funds can invest in stocks and bonds or commodities like gold or silver, or they can mimic the performance of an index like the Dow Jones Industrial Average or the S&P 500.
Preferred
Warren Buffett advises investors to invest in index funds, based on their long-term performance and stability during turbulent markets. Returns can come from a mix of capital gains – an increase in the price of the stocks held by the exchange-traded index funds – and dividends from those very stocks if you own an equity ETF that focuses on a core index.
Exchange-traded bond index funds consist of holdings in treasury bonds or high-performing corporate bonds. These funds can be used as a means to reduce the level of risk the portfolio is exposed to by diversifying with investments that traditionally provide gains when the stock market reflects.
Benefits and Drawbacks of Exchange-Traded Index Funds
Benefits of Exchange-Traded Index Funds
- Tax benefits.
- Liquidity.
- Cost
Source: https://www.thebalancemoney.com/making-money-from-etfs-357898
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