EFT Trading and Investing gives you Options

ETF Trading Investing Strategies

By Bobbie James

ETFs are a top-down traders dream. They cut out all of that messy fundamental analysis, which means they do not need to go snooping around financial reports to figure out what companies to invest in. They can just buy an ETF in the general economic area that tickles their fancy, and rest assured that most of that non-systemic risk will be diversified away. So how should you be using ETFs in your portfolio?

ETF Trading Gives Diversification

1. To Instantly Diversify Your Portfolio for an Extremely Low Cost. ETFs allow the small time investor to get immediate diversification with a negligible expense ratio. If you simply want to invest the "fire-and-forget" way, an ETF is the way to go. Just stick to a well diversified one like an S&P 500 (NYSE: SPY) or the Dow Jones Industrial Average (NYSE: DIA). That way, you are invested in the market, but without all of the hassle of trying to find a good mutual fund or hot stock pick. Numerous studies have shown that beating "the market" is nigh near impossible to do consistently. The closest an average investor can get to "the market" is through ETFs. That can save you an immense amount of time and headaches. Since the majority of financial professionals cannot beat the market in the long-run, why bother beating your head against the wall as well? Don't fight the market, become the market, a la ETFs.

2. To Focus on Areas of Opportunity

There are plenty of ETFs that deal with numerous countries, regions, and macroeconomic subjects. For example, you could put a little gold in your portfolio by buying a SPDR Gold Share (NYSE: GLD), which will closely track the spot price of gold. If you feel that China is going to outperform the rest of the world over the next 10 years, you could buy shares in iShares FTSE/Xinhua China 25 Index (NYSE: FXI). There are over 800 ETFs on the US market, and if there is an area that you want to invest in and get immediate diversification with low costs, you can be sure to find an ETF that fits your needs. This also fits well with acquiring a globally diversified portfolio. The typical IRA and 401K probably doesn't include investments in Singapore or Hungry. ETFs allow you invest on a global scale, but with many of the headaches and risks associated with foreign investment mitigated.

3. Better Understand the Timing

Since ETFs are indexes of stocks, they react more to big economic news than individual firm news (unless it is a really big firm, like BP or Chase). As such, you need to understand your economic indicators and when they are released. If you are thinking about getting in or out, be very aware of when the Fed is meeting, when government employment reports are released, and when the big boys in the index are release their earning statements. Those days will usually show much more volatility than the other days in-between. If you are investing in the long haul, catching the stock after a bad economics report can allow you to get in during a price dip. Half of investing is timing, so know what events are coming down the pipeline.

4. To Play the Volatility

That brings us to a more advanced subject, profiting on volatility. In these troubled times, the market is making some big swings. If the market is moving a great deal, the ETFs that track the market are also moving. Since options are available on ETFs, it may be worthwhile to utilize straddles and make money on those big movement days. They may not happen very often, but you only need one or two windfalls to make a profit. This is not something a beginning investor should get into. Trading options and utilizing various option strategies can be a bit complicated. This is only advised for investors that have a good grasp of options, options pricing, and option strategies.

ETF Trading To Manage Risk and Insure Your Portfolio

People insure their cars, houses, health, and the wellbeing of their loved ones (life insurance). However, not many insure their portfolio. This is especially important the closer one gets to retirement and the need for those funds gets closer and closer. Therefore, far out of the money put options on an ETF that closely resembles your portfolio is a great way to protect against those Black Fridays. It usually doesnt even cost a whole lot. Look at it like a cost of doing business or insurance. You may never need it, but how would you like to be the person that is looking at retirement and 1 week beforehand the whole market plummets? The closer you get to that withdrawal date of those funds, the more options you should be using to hedge the systemic risk that exists in the markets. Leaving it all up to chance is simply foolish and dangerous. So don't get caught with your pants down at the last second. In reality, ETFs are probably the most intelligent way to diversify your holdings and minimize your management costs. They also provide great opportunities for making money on volatility and insuring against systemic risk through the use of options. If ever there was a "perfect" investment vehicle, ETFs are it.

I invite you read more on investing in exchange trade funds by visiting the blog at ETF Trend Trading where you can discover stellar returns with managed risk. I also enjoy reading Kirt Christensen's take on the use of options at Options Science which combined with EFT Trading can give you a lot of strategies that manage your risk