ETF Strategies

By: EconomyWatch   Date: 3 August 2009

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EconomyWatch

The core Content Team our economy, industry, investing and personal finance reference articles.

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For a successful ETF trading experience, it is advisable to follow some ETF strategies. This will prove beneficial:

  • for earning profits

  • hedging against losses

 

ETFs are a great tool for diversification, particularly as they function like stocks.

Here are some strategies that can help an ETF trader to stay in a profitable situation:

 

ETF Strategy 1: Study the Current Financial Situation
 

Before any trader enters the ETF market, it is important to be aware of the condition of the financial market. Sectors performing well or expected to perform are the best investment options for ETFs. As ETFs are traded like stocks, making profits through arbitrage needs traders and investors to be alert and cautious of the growth and changes in the financial market.

 

ETF Strategy 2: Invest in Smaller Companies as well 

Most of the ETFs invest their assets in big companies, leaving out the smaller companies with the least focus. In financial turbulent times, big companies that are running on credit or having experimental investments, suffer a lot. They end up, causing losses in the ETFs. It is advisable to stick to an ETF that has a diversified portfolio, coupled with a balanced focus on small companies.

 

ETF Strategy 3: Protect your Portfolio
 

Invest in government bond ETF to safeguard your investment. Bond ETFs offer higher returns and are safer for hedging purposes. Also, try to invest in different ETFs to protect your portfolio further. A loss in one ETF can be compensated by making profit in another. So, create a portfolio that has true diversification.

 

ETF Strategy 4: Shift Sectors
 

Investing in just one sector like finance can cause huge losses especially in times of financial uncertainty. It is advisable to change sectors as and when the situation seems profitable. Investing in REIT ETFs can be profitable in developing countries where as investing in oil ETFs can be profitable in developed countries where its consumption is the highest.

 

ETF Strategy 5: Go global
 

The best thing about ETFs is that one can invest globally. So, identify the global potential areas and invest in their ETFs. Going global further diversifies the portfolio and hedges against losses.

 

Keeping in mind that ETF strategies work differently for different traders, a trader must know his budget and his return expectations. The above mentioned strategies are best suited for traders who like constant profits rather than high immediate returns.

 

 


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