How To Trade Exchange Traded Funds


Exchange traded funds are baskets of securities that track an index, sector, currency or commodity.  The proliferation of exchange traded funds has surged as both the retail and institutional investors have embraced these securities. In fact in 2017, ETF volume hit a record high. There are several benefits that investors can enjoy by trading ETFs.  

What Are ETFs

Exchange traded funds are securities that track the fluctuation of currencies, commodities, indices and sectors.  For example, you can trade an ETF that tracks gold, the Euro, the Nasdaq or the energy sector.  There are several benefits to trading an ETF. ETFs have stock like features which allow an investor to enter and exit during market hours.  This compares to many mutual funds where you can only enter and exit at the close of the session. Some have beneficial tax efficiencies. ETFs track nearly every sector or region and asset class, providing investors with a mechanism to generate diversified portfolio returns.

How To Trade Exchange Traded Funds

The Popularity of ETFs have Surged

Dow Jones, reports that State Street Global Advisors says that exchange traded fund flows reached $464 billion dollars in 2017, hitting a record high.  The increase of more than 61% shows that investors appreciate ETFs over other investment vehicles such as mutual funds which only saw $91 billion in flows during 2017. Global assets in ETFs reached $4.57 trillion in 2017 which was also a fresh record high. The largest ETF market is the US listed equity funds which hit a fresh record of $335 billion in inflows according to FactSet.

How To Trade Exchange Traded Funds

Types of ETFs

While equity ETFs are the most popular, as they track indices such as the S&P 500, the Dow Industrial Average, the DAX and the Nikkei, there are several other popular funds.  ETFs that track oil and gold have become very popular also hitting record inflows in 2017. There are also ETFs that track currencies such as the FXE which tracks the movements of the Euro.  You can find nearly every type of exchange traded fund within the listings of Vestle ETFs.

How To Trade Exchange Traded Funds

How to Trade ETFs

There are several types of ETF trading strategies.  You can trade them directionally using technical strategies like trend following. You can also trade them as a mean reversion trading strategy or a momentum strategy using the MACD (moving average convergence divergence) index or fast stochastic.  You can also use fundamental news to trade ETFs. You can use the Vestle financial calendar and find economic data points that could drive market movements. This could also include monetary policy or in the case of equities, financial results. Many traders also create pair trading strategies. This is where you believe one index or sector, or commodity will outperform another. For example, if you think gold will outperform silver, you can buy a gold ETF and sell a silver ETF.  If you add exchange traded funds to your trading arsenal, you can diversify your portfolio and generate consistent returns.

Author: Will Robins