Day Trading ETF – Is This the Right Way to Invest in ETFs

Jonathan Gibson asked:

ETFs have become a popular trading tool for many people over the past few years. There are now ETFs for basically any sector or index you can think of: ETF oil, ETF gold, ETF energy, ETF Dow, and so on. The list is a mile long. The basic thing about ETFs is that they allow you to cling to a portfolio of stocks or bonds and save you the time and the risk of handpicking stocks.

There are many trading styles which can be used when trading ETFs. Day trading is merely one of them. But is day trading ETFs such a good idea? Is Day Trading really suitable for the ETF tool?

The value of an Exchange Trade Fund (ETF) is a weighted average of all the stocks that are in it. This means you’re less exposed to risk, but it also means that Exchange trade funds tend to move in lower oscillations than regular stocks. An average is always lower than its highest member and higher than its lowest. That’s mathematics.

Day trading is basically trying to find stocks or bonds which move in one direction or another. But the shift in price needs to be enough to warrant the trade and make you more money. The lower the shift, the more transactions you need to make a substantial profit.

But we’ve already established the Exchange Trade Funds shift less radically than specific stocks do (this isn’t always the case, but it’s only to be expected). So, Day trading ETFs isn’t actually that suitable as a rule. It’s better to day trade specific stocks. Sure, you can still make money by day trading Exchange Trade Funds, but this investment tool wasn’t made for this.

Personally, I don’t believe in day trading in general, but if you’re going to trade ETFs, you might as well do it in the right way and not the wrong.

Jeremy