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What Are the Different Types of ETF Trading Strategies?

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  • Written By: Peter Hann
  • Edited By: Angela B.
  • Last Modified Date: 28 September 2016
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Exchange traded funds (ETFs) are traded on exchanges in the same way as individual shares and can be bought and sold at prices quoted during the trading day. The extent of an investor’s exposure to these funds can be tracked at all times and the liquidity of the investments can improve the management of a portfolio. Many ETF trading strategies provide a straightforward route to diversification, allowing exposure to a basket of securities and to the broad range of available asset classes. The use of well-designed ETF trading strategies also offers a choice of investing in specific geographical areas, single countries, a particular asset class or a particular commodity. An exchange traded fund provides a suitable means to include in an investment portfolio an asset class that is otherwise hard to access, and this can be used to adjust the overall direction of the investment portfolio.

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Exchange traded funds are cost effective, with relatively low expenses compared to other types of fund. For the investor who is looking for an investment for the long term, the best strategies are those that will help to fill allocation gaps in the portfolio and replace investments in other mutual funds carrying higher fees. These investments are highly liquid, so they can be used to manage the cash held by the investor. An investment in a short-duration bond ETF, for example, enables cash arising from the sale of other investments to be re-invested quickly and for short periods, if required.

ETF trading strategies may be found to fit a particular investment style. They provide a way to develop a diversified portfolio across regions and asset classes and can be used to invest in important trends in the world. ETF trading strategies may involve identifying global themes that will become stronger in coming decades, and the investor may include these themes in a portfolio. The investor may, for example, consider the increasing importance of agriculture or water to a growing world population, the global need for a more sophisticated infrastructure or the increasing emphasis on environmentally friendly energy. Exchange traded funds that are in line with an important global theme may be used to shape the investment portfolio.

Many investors use ETF trading strategies as a supplement to their portfolio to ensure their investments are well diversified. Riskier ETF trading strategies include acquiring an investment portfolio consisting entirely of ETFs. This enables the investor to acquire an inexpensive but diversified portfolio and reduces the effort that would be involved in picking individual stocks or assessing commodities or regional investments.

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