You may have heard of ETFs and some of you even have them in your portfolios, but not many investors are aware of the diverse ETF trading strategies these assets have to offer. However, after reading the 14 ETF trading strategies listed below, you will be that much more of a savvy trader and have more weapons in your investing arsenal.
1. Invest in the Market with ETFs
Like an index, you can use ETFs to invest in the stock market or even play market volatility. There are ETFs for the NASDAQ like the QQQQ’s. There are ETFs for the S&P like the many SPDRs. There is a Dow Jones ETF (DIA). And for those who want to trade market vol, there are quite a few ETFs and ETNs that track the CBOE Volatility Index (VIX)
And you don’t have to stop with those markets, there are many more markets just waiting for buyers and sellers, and there are just as many market ETFs that track them.
2. Use ETFs to Gain Exposure to an Industry
Maybe you don’t want to invest in a market as much as a particular industry. Do you think producing clean coal is the next “green” advancement? Maybe a coal mining ETF is the way to go. Whether it’s financials, defense, or even technology, it’s much easier to buy an industry ETF than trying to corner the market in sector equities.
3. Invest in Commodities without Investing in Commodities
Let’s face it, you don’t have room in your basement for a barrel of oil, a chest of gold, and some cattle (or maybe you do). However, you do have room in your portfolio for commodity ETFs. Without stocking up on livestock, you can purchase a commodity ETF and have instant exposure to the commodity market. It’s a much easier transaction and you don’t have to water it.
4. Foreign ETFs Give You Access to International Markets
Foreign investing can get complicated. Currency adjustments, foreign tax laws, and just general overseas challenges. However, there are ETFs that make international investing much easier. Foreign market ETFs, funds that are domestic currency-based, emerging market ETFs, broad foreign funds, and even ETFs than track individual countries like Brazil and China. There’s no longer any reason to fear investing outside the U.S. or any country. The world is your…ETF.
5. Bond ETFs are the Gift that Keeps Giving
Bonds ETFs are a little more enticing than most investments because they not only trade on secondary markets, but they can also create a revenue stream in your portfolio.
Bond investing in general can be difficult. Coupon rates, default risk, duration. However, a bond ETF can alleviate some of that complexity by giving investors one pre-packaged asset that gives instant access to the bond market.
6. What About ETNs?
Speaking of debt instruments, there are variations of ETFs known as ETN’s, exchange traded notes. ETNs are assets issued by a major bank as senior debt notes - unlike ETFs which consist of securities such as commodities, currencies, futures, forwards, and options.
When you buy an ETN, you buy a debt asset similar to a bond, but the terms of the debt contract are determined by the structure of the note. ETNs are backed by a bank with a high credit rating, so they are pretty secure products. However ETNs are not without credit risk, just a lower level.
7. Play the Currency Market With ETFs
Bond ETFs and ETNs are two ways to play the interest rate market, but when it comes to foreign interest rate trading, look no further than currency ETFs. Whether you want to invest in a broad currency asset, a region currency like Europe, or even an individual country currency, ETFs have got you covered…literally. Currency ETFs are a great way to hedge foreign risk, play foreign interest rates, or just invest in foreign currencies.
8. Playing ETFs on the Downside
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 trade. So it makes sense that there are ETFs specifically created for bearish investors.
Creating downside is possible by selling any ETF, but what if I told you that you can buy an ETF and still get short. It’s true and it’s called an inverse ETF. Perfect for investors who have restrictions against selling, but want to get short; they can buy an inverse ETF.
9. Hedging Risk with ETFs
Again we come back to “investing means buying”. But a big part of investing is also protecting against risk. That’s where ETFs can help. Do you have a large diversified portfolio that wins when the market rises? Protect downside by selling a market ETF. Short a lot of oil stocks? Buy an oil ETF to protect your upside exposure. Long an index? Protect your position by selling an underlying ETF.
10. Hedge Indexes with ETFs
I alluded to this above, but ETFs are a great way to protect index positions. If you’re long a particular index, you can make an opposing trade to protect your risk. Some indexes have multiple ETFs that track it, so the opportunities can be plentiful when it comes to hedging your index risk. Trade an ETF to protect some or all of your index position or in some cases put on a similar index position by using an ETF instead. After all, that’s why they were created.