Nowadays, there are many people trading ETFs, from the high end professional trader right the way through to the arm chair enthusiast. ETFs – or exchange traded funds – are popular with investors due to their convenience and low fees. An ETF can also allow you to diversify your portfolio and mitigate risk without having to manage dozens of individual securities.
If there’s an instrument you want to trade whether its oil, gold, stock indices or even lean hogs, the chances are there will be an ETF tracking it. ETFs track many industries and sectors, and even offer ways to profit in downward trending markets.
Just in case you are not aware, ETF stands for exchange traded fund. An ETF usually aims to track the price of an underlying instrument. Oil and gold ETFs are very popular amongst traders and many these funds do a good job at tracking the underlying instruments.
Advantages Of Trading ETFs
One of the big advantages of ETF trading is that ETFs are perhaps one of the easiest ways to trade. You don’t need to have any knowledge of how the futures or currency markets work. An ETF also offer the advantage of stock-like tradability, a distinct difference from mutual funds.
Another advantage of ETFs is that you can go long and short on many of them. Inverse ETFs as well as leveraged ETFs are some examples of alternative ETFs, and offer you alternative ways to profit in a variety of markets.
There are many ETF trading strategies and systems that traders use. One strategy is ETF swing trading. This is where trades are typically held for a few days up to a few weeks. Your ETF trading strategy will depend on your unique goals and objectives.
Another type of trading is ETF trend trading. These types of traders typically try to make trades that are with the trend. It’s often a good idea to wait until the market retraces before getting into a trend trade so you can be sure you are not buying at the top.
How To Trade ETFs
If you are wondering how to trade ETFs, they can be bought just like conventional stocks, through a broker. Zecco and Tradeking are good examples of stock brokers that can be used to buy and sell ETFs. For a more detailed look at stock brokers, feel free to check out my discount stock brokers page.
What are the considerations when choosing an ETF?
There are two very important factors to consider:
1) How well does the exchange traded fund track the underlying?
2) How much are the management fees?
Let’s discuss the first point. Some instruments such as oil can be a little more difficult to track. It is unlikely (though not impossible) that a fund will store physical barrels of oil. Most commonly, oil funds use the futures markets to track oil. Futures contracts are usually in backardation or contango. This can make it very difficult to follow oil exactly. If you would like to learn more about backwardation and contango, a good read are the wiki pages here and here.
If you don’t want to look into all that complicated stuff, which I wouldn’t blame you. The best thing you can do is to look at how an instrument has performed in the past and compare it to the ETF.
The second point is the management fees. These can vary greatly between different funds. There are often reflected in the funds NAV.
Below are some further articles on individual exchange traded funds: