Exchange-traded Funds (ETFs) have become an essential tool used by traders to record positive returns, diversify portfolios, and gain greater control of their trading career.
ETFs have been around for years but grew in popularity among non-traders during the build-up to the launch of the first Bitcoin ETFs. Many people are familiar with the term and concept but need help understanding the inner workings of this asset class. If you’re interested in trading ETFs, you’ve come to the right place because this piece has all the relevant information you need to kick-start your strategy.
Dissecting ETFs
ETFs are exactly what the name says: Exchange-traded funds. They are made up of several investment classes, like stocks or bonds, and are designed to track the performance of said securities. They can also be broader in the sense that they invest in various types of assets, such as crypto, precious metals, commodities, and more. New and veteran traders can invest in different types of ETFs directly or through services like TradingView Singapore.
A different type of ETF that involves pooling investments in a single asset class across multiple instruments or organizations is also available. A good example is a crypto ETF that invests in different types of cryptocurrencies and digital assets, such as Bitcoin, Solana, DOGE, and the like.
You need to decide what you’re interested in before investing in ETFs, if you need help deciding, financial advisers and fund managers can shed more light on what the different types of ETFs entail, potential returns, volatility, and other relevant aspects potential investors must consider.
Knowing about ETFs is one thing, but developing great strategies will ensure that you have long-term success and achieve your financial goals. Here are a handful of investment strategies you can build your trading philosophy around if you’re a new trader. Existing professionals in the space can also add a couple of these strategies to their existing war chest.
Thematic Investing
Thematic trading requires investing in ETFs that prioritize “trending” investment topics and themes over specific financial instruments. Thematic ETF investment requires moving fast and jumping on investments quickly. These funds also move on from certain themes when they’re no longer actively talked about and hyped. There are thematic ETFs that consider long-term trends in spaces like crypto, energy, and rare metals to make short-term investments.
Hedging
Hedging is a popular concept in the finance space. It may be a bit complicated to understand at first, but once you do, it opens up a world of opportunities. Hedging involves selling or buying investment instruments to help cover the potential value decline of another security or asset. An example of this concept in action is when an investor holds significant short-term positions in an asset and invests in inverse ETFs or sells a stock ETF long, resulting in favorable returns if the stock position rises in value.
Short Selling
Short selling is essentially borrowing stocks or other assets with the aim of making a profit if the said asset depreciates in value. Imagine a trader investing in 10 SGD worth of a company’s stock. The short seller borrows this stock for two weeks and sells it on the market. If the asset does lose value, the trader makes a profit by repurchasing the same quantity of stocks at a lower price, let’s say 9 SGD, and keeping the difference. Beware, ETFs can lose money using this strategy if the asset grows in value during the time.
Swing Trading
ETFs are expertly positioned to take advantage of this strategy due to their internal structures. This strategy takes advantage of significant price changes in assets like commodities, stocks, or currencies. It differs from day trading, since swing trading takes longer to complete “a cycle.” If you choose a well-structured ETF, you can expect to take advantage of the positives associated with this strategy while minimizing exposure to the negatives.
Buy and Hold
The buy-and-hold ETF investment strategy isn’t for everyone because it takes time to complete investment cycles. If you’re interested in short- or medium-term returns, this strategy might not be ideal for you. ETFs purchase financial instruments and hold them for long periods (sometimes more than a decade). Some of the wealthiest people in the world choose to invest in such funds because they understand the power of time and longevity in the market.
Pairing a diversified portfolio with the buy-and-hold strategy can reduce exposure to extreme market movements. Some funds offer medium-term options of around five years to people who cannot wait for their assets to “fully mature.”
Invest in ETFs Wisely
There are a plethora of strategies you can implement as an ETF investor, and there are different types of funds and ETFs you can choose from. What you’ve learned today is merely the tip of the iceberg. So, go forth and invest wisely.
Featured image credit: edited from pexels
