Learn To Trade ETFs

Learning to trade ETFs (exchange-traded funds) can offer you additional kinds of trading opportunities compared to trading just stocks. ETFs are like a hybrid financial instrument that combines some of the neat features of both mutual funds and individual stocks – all wrapped into one financial instrument.

Due to its stock like features, ETFs can be traded as if you were trading just one of your favorite stocks or other types of financial instruments where you are really trading a “basket” of stocks, commodities or some other underlying asset class.

With having ETFs as part of your trading arsenal, you can trade the “whole” financial market, hottest sector of stocks (biotech, technologies or financials, etc.), international funds, currencies and even commodities like gold, oil, copper, sugar and coffee (to just name a few).

Since the launching of the first american ETF in January 1993 (S&P 500 Trust ETF), the ETF industry has grown tremendously and keeps on pumping out new and more creative ETF products all the time to fill the increasing demands of traders and investors alike for what is now a trillion dollar industry.

ETFs can be used for any type of trading styles including day trading, swing trading, trend trading and position trading. They can also be traded by either going “long” or “short” depending on your market outlook as to being either bullish or bearish (prices rising or falling respectively).

Benefits Of Trading ETFs

Some of the appealing benefits of trading ETFs include the following:

• Flexible as trading vehicles
• Tax efficient by having less capital gains distributions due to less trading activity
• Transparent as to bid-ask price quotes and investment positions held within the fund
• No required minimums to start trading or investing
• Less costly than mutual funds as to fees and expenses
• Can manage trading risk by using them for hedging and diversification purposes
• Many are actively traded (by traders and institutions) causing them to be extremely liquid resulting in tight bid-ask price “spreads”
• Wide array of different categories of ETFs to choose from

Just Like Mutual Funds – ETFs Can Offer Diversification

ETFs can offer diversification due to the nature of holding numerous investment positions that are all held in one fund. One of the so-called benefits of being diversified is that you can reduce overall trading and investment risk by having investment positions allocated among uncorrelated industries.

To illustrate, an ETF can still rise in price even though one of the companies included in the fund has just blown their reported quarterly earnings (or some other major corporate mishap) resulting in that stock’s price suffering dramatically. But, since most of the other companies included in the fund had risen in price, which more than absorbed that company’s fall in price, the funds price still rose overall. That is what the power of diversification can potentially do with respect to the price of an ETF.

Being diversified in such a fund can also help to protect you against “GAP” risk which can occur when trading individual stocks, especially during earnings season.

Unlike Mutual Funds – ETFs Trade Just Like Stocks

ETFs are much more flexible than mutual funds when it comes to trading. They are more like there stock counterpart in this regard.

For instance, you can do the following things with ETFs:

• Actively trade them at any time during the trading day
• Can be traded by either going “long” or “short”
• Trade the underlying options
• Ability to be traded on margin
• Use different types of advanced trading orders to trade them at your own discretion

Many ETFs Are Actively Traded

There are many popular big name ETFs that are actively traded each and every day by traders and institutions alike with daily share volume reaching into the millions such as the following ones:

• SPY – SPDR S&P 500 Trust Series
• QQQ – PowerShares QQQ Trust Series – NASDAQ
• IWM – iShares Russell 2000 Index Fund
• XLF – Select Sector SPDR fund – Financial
• GLD – SPDR Gold Trust
• USO – United States Oil Fund

Broad Range Of ETF Categories

There is a broad range of ETF categories to choose from to fit your trading and investing needs including:

The ETF Industry Is Backed By Big Institutions

Some of the biggest known institutional providers in the ETF industry responsible for creating all sorts of ETFs include:

• iShares (by BlackRock Inc.)
• State Street Global Advisors
• Vanguard

Finally

Trading ETFs can be a great counterpart to be added to your trading plan, especially if you are looking for exposure and other trading opportunities outside to that of just trading individual stocks alone.