ETFs (Exchange Traded Funds) are ideal for starter investors because of their various advantages like low expense ratio, range of investment choices, abundant liquidity, low investment threshold, diversification, and so on. These characteristics also make the ETF an ideal vehicle for various investment and trading strategies. In this article, we will have a look at the 5 effective ETF investing strategies that you should keep in mind.
5 Most Effective ETF Investing Strategies
First, ensure that you are not missing the forest for the tree. You are not searching to buy any ETF simply because you have known that they are great; you are searching for exposure to corporate bonds, international small cap stocks, or a diversified basket of items, whatever part of the market you would like to make an investment in. With that let us have a look at the 5 most impactful ETF investing strategies.
1. Dollar-Cost Averaging (DCA)
We start with the most primary approach among the various ETF investing strategies: DCA (dollar-cost averaging). DCA is the technique of purchasing a set fixed-dollar amount of an asset on a normal schedule, regardless of the altering cost of the asset. Starter investors are generally young people who have been in the workforce for more than a year or two and have a stable source of income from which they are able to save a little every month.
Such ETF investors should take a few thousand INR each month and, instead of placing it into your low-interest saving account, invest it in an ETF or you can also invest in a group of ETFs.
2. Asset Allocation
Asset allocation, which implies allocating a portion of a portfolio to varied asset sectors, such as stocks, commodities, bonds, and cash for the aim of diversification and is a strong investing element. The low investment threshold for most of the ETFs makes it convenient for a starter to execute a basic asset allocation approach, relying on their investment time horizon and also risk tolerance.
For an instance, young investors might be 100 percent invested in equity Exchange Traded Funds when they are in their 20s as their long investment high-risk tolerance and time horizons. But as they get into their 30s and start on major life cycle alterations like beginning a family and purchasing a house, they may move to a less aggressive investment mix like 60 percent in equities ETFs and 40 percent in bond ETFs. This is among the most effective ETF investing strategies.
3. Swing Trading
This is the ETF swing trading strategy. Swing trades are generally trades that seek to take benefit of sizable swings in stocks or other tools such as commodities or currencies. They can take an investor anywhere from a few days to a few weeks to work out, unlike day trades, which are at times left open overnight.
The traits of ETFs that make them ideal for swing trading are their variegation and tight bid or ask spreads. Along with that, because ETFs are accessible for many varied investment classes and a broad range of sectors, a starter can select to trade an ETF that is dependent on an asset or sector class where they have some prominent knowledge or expertise.
For instance, someone that has a technological background may have a benefit from trading a technology ETF such as the Invesco QQQ ETF (QQQ), which tracks the Nasdaq-100 Index. A starter trader who closely monitors the commodity markets may choose to trade one of the many commodity ETFs accessible, like the Invesco DB Commodity Index Tracking Fund (DBC).
Because ETFs are generally baskets of stocks or other types of assets, they may not portray the same degree of upward price shift as a single stock in a bull industry. By a similar token, their diversification also makes them less susceptible in comparison to single stocks to a big downward shift. This offers some safeguard against capital erosion, which is a crucial consideration for starters.
4. Sector Rotation
ETFs also make it relatively convenient for starters to implement sector rotation, dependent on varied stages of the economic cycle. For instance, assume an investor has been invested in the biotechnology sector via the iShares Nasdaq Biotechnology ETF (IBB). An investor may want to earn profits in this ETF and change into a more defensive industry like consumer staples through The Consumer Staples Select Sector SPDR Fund (XLP).
5. Short Selling
This is the final approach among the list of 5 effective ETF investing strategies. Short selling, which is the sale of a financial instrument or borrowed security, is usually a pretty risky attempt for most investors and is not something most starters should try. However, short selling via ETFs is preferable to shorting individual stocks of the lower risk of a short squeeze, which is a trading scenario in which a commodity or security that has been highly shorted spikes higher, as well as the prominently lower cost of borrowing. These risk-mitigation thoughts are crucial to investing in ETFs for beginners.
Short selling via ETFs also allows a trader to take the benefit of a broad investment theme. Hence, an advanced beginner who is used to the risks of shorting and wishes to start a short position in the developing markets could do so via the iShares MSCI Emerging Markets ETF (EEM). However, note that starters stay away from double-leveraged or even from triple-leveraged inverse ETFs, which seek outcomes equal to thrice or twice the inverse of the one-day price alteration in an index, because of the prominently higher degree of risk inherent in these ETFs.
ETFs (Exchange traded funds) have various features that make them perfect instruments for starter traders and investors. Some ETF investing strategies, mainly ideal for beginners, are dollar-cost averaging, swing trading, asset allocation, sector rotation, and short selling. But before you invest, we will always recommend you to do your own research and then start your ETF investment.