Are you looking to diversify your portfolio, or hedge against position risk, but are unsure where to start or what your options are.
Well Trading ETFs is a great option, and can be a real asset to your stock market portfolio. Everyday there are thousands of stock market investors that are taking advantage of exchange traded funds, because they understand the real value that an ETF Trading System provides.
Below is a list of advantages that I've put together to help you get on your ETFs trading way.
Top 7 Advantages of Trading ETFs
Diversify in the Broader Market, Industries or Sectors
Rather than investing in individual stocks, many traders prefer to invest their capital into a market ETF. If your bullish on the Dow or NASDAQ, you could go long on a ETF like the DIA or the QQQQ's to ride a predicted bull trend. Trading the Market ETF's is a great way to diversify you capital without having to buy many individual stocks, indexes, or costly mutual funds.
Maybe you'd like to be a bit more specific with your ETF choice, for example you could be Bearish on a Industry or Market Sector like the Financial Sector, right at the beginning of the Global Financial Crisis, you could short sell an ETF like XLF and ride it all the way to the bottom.
Diversify in Foreign Markets, Commodities & Currencies
While investing in your local stock market may offer some familiarity, with ETF's its possible to also invest in most foreign markets around the globe, and diversify your risk to the domestic market. There are ETFs for foreign markets, such as China or the Australian Stock Market for example, that can help diversify your capital into areas that have no direct correlation to your local market.
Similarly if you have been following the Forex markets, and are keen on the Euro/USD pair, you could trade the FXE exchange traded fund, to take advantage of any move in your favor. Or maybe your Bearish on Gold, or any other commodities for that matter, there is the GLD ETF to suit your needs.
Buy ETFs to Get Short, or 2 or 3 Time Leverage
One of the real advantages of Trading ETFs is if your bearish on a ETF, you can buy an inverse ETF, which will allow you to inversely track an index. So as the Index trades down, the inverse ETF trades up in price. So there is no need to short sell a ETF or even have any special margin requirements.
In recent times many of the more popular ETF's have a leveraged big brother, which can either be 2 or 3 times leveraged. They even have 2 or 3 times leveraged Inverse ETFs. Its worth noting that like with any leveraged instrument, it is a double edged sword, and you need to understand and accept the risks associated.
ETFs are a simple structure and are easy to understand. They are also designed to very closely track the particular index.
Hedge Risk with ETFs
Whatever your stock market strategy, hedging your positions with ETF options is a great way to minimize your portfolio risk. For example you could buy an ETF put option to hedge against a long position, if you wanted to protect profits or where concerned about a market pull back.
Reap the Tax Benefits
There is a real difference from how capital gains tax is treated, when comparing ETFs and mutual funds / indexes. With a ETF the CGT is not realized until the entire ETF is sold, where a CGT on a mutual fund is realized when trades are made during the life of the position.
Save on Commissions and Fees
When an ETF is traded, it is one trade, one commission. So trading ETFs can save you money on commissions and trading fees.
On the other hand when trading mutual funds, and you buy or sell an index basket, you pay commissions and trading fees on each trade within the basket.
So if you haven’t yet considered the difference that Trading ETFs could make to your portfolio, consider the advantages that savvy utilization of ETFs could add to your Trading Plan. As there has never been an easier time to get started with trading exchange traded funds.