Different Uses of Exchange-Traded Funds (ETFs)

ETFs can be used in many different ways. Here are some ways you can take advantage of your exchange-traded fund. Read on!

Index Investing with ETFs

From a strategic point of view, the first and most obvious use of ETFs is as a tool to invest in broad TradersHome Broker market indexes. On the equity side,  there are ETFs that mirror the S&P 500, the NASDAQ 100, and the Dow Jones Industrial Average and just about every other major market index. On the fixed-income front, there are ETFs that follow a variety of long term and short term bond indexes.

Using ETFs to cover the major market sectors, you can quickly and easily assemble a low cost, widely diversified index portfolio. With just two or three ETFs, you can create a portfolio that covers almost the whole equity market and a large portion of the fixed-income market.

Once the trades are complete, you can simply stick to a buy and hold strategy, as you would with any other index product and your portfolio will move along with the benchmark.

Actively Managing a Longer Term Portfolio

In  a similar manner, you can create  widely diversified portfolio but choose an active management technique rather than simply buying and holding to track the major indexes (this is passive management). While the ETFs themselves are index funds, meaning there really is no active management on the part of the money manager overseeing the portfolio, this doesn’t stop investors from actively managing their holdings.

The major TradersHome Review market index only represents a portion of the many investment opportunities that ETFs provide.  If your core portfolio is already in place, you can augment your core holdings with more specialized ETFs, which offer entry into a wide array of small cap, sector, commodity, international, emerging market, and other investing opportunities.

There are ETFs that follow indexes in just  above every are, including biotechnology, healthcare, REITs, gold, and more.

Active Trading with ETFs

If actively managing a long term portfolio is not hot enough for you, ETFs can still be the right type for you. While long term investors might veer off from active and day trading strategies, ETFs are the perfect vehicle if you are searching for a way to move frequently into and out of an entire market or a particular market niche.

Since ETFs trade intraday, just like stocks or bonds, you can buy them and sell them rapidly in response to market movements, and unlike many mutual funds, ETFs impose no penalties when you sell them without holding them for a set period of time.

While it’s true that you have to pay commission each time you trade ETFs, if you are aware of this cost and the dollar value of your trade is high enough, it is nominal.

In addition, because ETFs are traded intraday, they can be bought long or sold short, used in hedging strategies, and bought on margin. If you can think of a strategy that can be applied with a stock or a bond, then that strategy can be applied with an ETF. Instead of trading single stock or company, you are trading a whole market or market segment.