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Exchange-traded funds are popular for newer investors because of their lower expense ratios, high liquidity, range of choices, and many more. However, it isn’t really easy to manage an ETF portfolio. So, we’ve listed down some of the most common ETF strategies that you can use.
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Dollar Cost Averaging
Dollar cost averaging refers to the technique of buying fixed dollar amount of a security on a regular basis. This technique disregards the changing cost of the asset.
The first advantage of the dollar cost averaging technique is that it teaches discipline to the savings process. For experts, this method provides the sense of “pay yourself first,” which is what you accomplish when you start saving.
Another advantage of dollar cost averaging comes from its very essence. Because you invest a regular amount of money regardless of the asset price, you accumulate more units of the ETF when the price is low. And when the price is high, you accumulate fewer units.
Therefore, you average out of the cost of your holdings.
Swing Trading
Swing traders are those that take advantage of sizable swings in stocks or other instruments such as currencies or commodities.
The trades can be anywhere from a few days to a few weeks. And because of ETFs’ tight bid-ask spreads and diversification, they make for suitable swing trading assets.
At the same time, because ETFs exist for many different asset classes and sectors, the newbie investor can swing trade an ETF that is based on his or her preferred asset class or sector.
Short Selling
Short selling refers to the sales of some borrowed assets or financial instrument. It’s often a risky undertaking for most investors, making beginners shy away from this technique.
On the flipside, though, short selling through ETFs is better than short selling individual stocks since there is a lower probability of a short squeeze, which is a trading scenario in which that an asset spikes higher after it has been shorted very heavily.
Seasonal Trends
ETFs are also very useful tools for beginners to bet on seasonal trends. Some of the most popular seasonal trends include the “sell in May and go away” trend, which alludes to the fact that US stock markets typically underperform over the six months from May to October.
Another popular seasonal trend is the gold’s tendency to spike through the months of September and October. During these months, gold demand in India rises ahead of the wedding season and the festival of lights, which usually occurs between October and November.
Hedging
A newbie investor may also sometimes have to hedge or protect against downside risks in a portfolio. Hedging is basically that.
For instance, if you have a huge portfolio of US blue chips, and you want to protect it from the chance of a large decline, one thing to do is to buy put options.
However, because beginners aren’t usually familiar with options trading, the alternative becomes shorting in broad market ETFs.
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