ETF Trading Strategies

The following strategies are used to trade ETFs.

Core/Satellite
Hedging
Leverage
Options
Shorting
Sector Rotation
Tax Loss Harvesting


Core/Satellite
This plan of action is a combination of index and active investing. Index investments, like ETFs, become the bedrock of the portfolio’s construction as well as intensely administered investments are added as satellite positions. Investors index their center holdings to more effective asset classes and restrict their choices to active managers that deliver consistent alpha or out performance for added categories. Most large pension plans today utilize a core or satellite approach in their investment policy and countless individual investors are starting to have similar approaches.

Hedging
ETFs are productive hedging tools for administering risk. Take for instance, investors will be able to guard against over concentrated equity positions by utilizing ETFs as single stock substitutes. This type of hedge technique can decrease risk and volatility by allowing stockholders to diversify elsewhere from larger equity positions to companies that own or work at. Inverse performing or short ETFs allow investors to hedge against a market decay.

Leverage
ETFs can be leveraged with margin like individual stocks. Margin is acquiring money from a broker to purchase securities, it involves considerable risk. Minimum maintenance requirements are administered by the FINRA (Financial Industry Regulatory Authority), by the NYSE and by individual brokerage firms. While margin investing can make money for investors correct, the interest charges or borrowing costs can deteriorate returns.

Options
ETF investors have an abundance of option strategies available. Purchasing call or put options can be an ambitious method. By paying a premium, an options investor will be able to control a large amount of ETF shares. The premium price is a small portion of what it would cost to buy the shares in the open market. This supports an options investor with a great amount of leverage and a high risk or reward opportunity.

A more aggressive way utilizes put options in combination with portfolio holdings. Purchasing protective puts on ETF positions will insure a portfolio against declining prices. There are other tactical possibilities with options.

Shorting
ETFs can be shorted just like individual stocks. Shorting includes selling borrowed shares an investor does not currently own by assuming the price of an ETF will lessen in financial worth. However, if the ETF does decrease in financial worth, it can be purchased by the short seller at a lower price, which results in a profit. Shorting individual stocks on a downtick isn’t acceptable. But ETFs are an exemption to this rule. This translates into easier and fluid short selling with ETFs.

Shorting is an advanced technique and involves substantial risk.

Sector Rotation
Convenient market exposure to various industry sectors is easily found with ETFs. By carefully shifting assets, investors may over and underweight distinct sectors according to their economic outlook, market objective or financial research. Possessing or exchanging concentrated business segments lets ETF investors capitalize on both the positive and negative sector trends.

Tax Loss Harvesting
Wash-sale rules wouldn’t allow investors to apprehend a stock deficiency if they repurchase the identical stock within a 30 day period. This situation can be prevented with smart tax loss planning. By transferring the loss earnings into an ETF in the identical sector as the stock, i.e., the wash-sale rule may be prevented. This will allow investors to counterbalance any capital gains with capital losses and continue to maintain market exposure.

Comments are closed.

Teachers - Registration Is Open For Our Free Fall Financial Literacy Challenge!Details & Registration
+