ETF Trading Explained

Daniel Webb asked:

ETF Trading is a new venture that some savvy traders are looking into to help make their money work for them. The concept is nothing new. In fact it is a solid and intelligent one that can yield maximum profits without entailing a convoluted process. And it is wise for investors and traders to always be on the lookout for a new method of improving the profits on their investment capital.

ETF trading (an exchange traded fund) is a variant on the traditional investment portfolio that is comprised of various investments which are designed to be traded in the same manner as a stock. But, of course, they are not stocks; they are a collective of various securities designed to keep track of how an index performs. Some may think this is similar to a mutual fund and, in some ways, it is. However, there is also a huge difference between ETF trading and mutual funds. That difference is that you have the potential to buy and sell an ETF throughout the same day. Yes, that means that these securities can be day traded on the American Stock Exchange and the various other legitimate world markets. Additionally, restrictions and limits associated with the closing sale price of a mutual fund would not factor into the equation.

Some may here the term ‘day trading’ and feel somewhat put off by the notion. They may have heard of high fees or other complexities associated with such trading. Here is some news for those that may have had second thoughts about looking into ETF trading: the process is not as restrictive as day trading and the concept of minimum investments is waived. It is possible sell short or buy as much as they wish to. And since the aforementioned concept of a locked mutual fund price is not part of the issue, traders are able to make purchases or sales based on current market prices and indications.

There are other uses for an ETF investment other than trading. These investments have been used to hedge portfolios, they have been optioned, and even bundled with other investments. It is this flexibility that has most definitely made this type of trading popular and effective in various investing circles. This is why more people are looking towards ETF trading as a viable concept for making their money grow in a variety of ways. This flexibility is further benefited by the fact that many have experienced reliably decent returns on their investments which certainly adds to the great value of exploring ETF trading.

Then, there is another major positive associated with working with ETF securities: there is no rule that says you cannot hold on to them for an extended period of time and term them into long term investments. In fact, many people prefer to use them for just this purpose and the end result is often something that is quite positive and impactful.


ETF Trading Strategies Explored – Be the First to Know

Mark Brian asked:

Strengthening portfolios, by trading ETFs is a common occurrence among investors today. Portfolios are packed with bonds, stocks, representatives of a stock collection or commodities from a specific sector. There are financial ETFs, bond ETFs, oil ETFs, and also gold ETFs. Using ETF trading strategies to further the growth of your investments might be just what you are looking for. The following information describes various strategies used among investors of Exchange Trade Funds.

Placing Bets on Sectors – Betting on entire sectors at once isn’t uncommon today. Many investors prefer to place bets on stocks of a specific kind instead. Let’s say an investor wanted to keep an eye on the euro, whereas his comrade prefers to follow all currency ETFs. This is an example of one investor focusing on an individual stock, while the other monitors a whole sector.

Options for Bond Betting – Bets are able to be made on anything that can be tracked by an index. Tracking of this kind can be used for segments of a yield curve, corporate bond indices, or Treasuries with inflation protection. There is a relationship between the maturity time and the interest rate on borrowed money in a give currency.

The Strategy of Pairs Trading – An algorithmic trading strategy is the basis for pairs trading today. This strategy is built around models which decide on the amount of spread, based on data mining and historical analysis.

The term hedging is used when referring to stocks and its derivatives that have pairs trading going on between them. When one stock goes up and the other goes down, the one that went up is sold. After selling the stock that traded up, the stock that went down is purchased. This swap is done with the thought that since one went down, it must be getting ready to go back up. Trade pairs may include companies such as Wal-Mart and Target, Dell and Hewlett-Packard, or Pepsi and Coca-Cola.

Industry Emphasis – The weight of portfolios can be shifted towards specific industries by buying ETFs within the same industry or sector base. Having a broad-based ETF and then buying a health-care ETF will bring about health care industry exposure to your portfolio.

Predicting the Market – Being able to predict what will happen on the market, with ETFs, enables investors to buy or sell with confidence. Timing the market is the strategy of deciding to either buy or sell stock by also trying to predict what the future of the market will be. Predictions are based on either conditions within the economy or from the result of a fundamental analysis. This strategy is based on an aggregate market prediction instead of a specific financial interest.

Making sure you understand these ETF trading strategies described above will make you a more knowledgeable investor.