Posted on 15 October 2011.
When ETFs first burst onto the scene nearly 20 years ago, no one could have foreseen the myriad ways these products could be traded. Simply put, there is quite possibly a never-ending list of ETF strategies investors of all skill levels can employ. Of course, with great choice comes great responsibility and that means taking the time to find the ETF trading strategies that work best with your personal investment style and objectives.
ETF trading strategies run the gamut from the overly complex to the simple, but surprisingly potent. In that vein, it is critical to remember that there is no one-size-fits all approach to ETF trading strategies. The best place for new investors to start shopping for ETF trading strategies is by establishing what they want to trade: Indexes, sectors, commodities, currencies, international markets or bond ETFs.
Perhaps the easiest of the ETF trading strategies to employ is sector identification. And don’t be fooled. Just because this is one of the easier ETF trading strategies to employ doesn’t mean it can deliver some noteworthy returns to your portfolio.
Think about sector identification as an ETF trading strategy this way: Nearly every sector and dozens of sub-industries are represented in the ETF universe. There is also a plethora of inverse and leveraged inverse ETFs that represent these sectors.
This how this ETF trading strategy would be employed: Let’s say you’re bearish on an oil ETF like the SPDR S&P Oil & Gas Exploration & Production ETF (NYSE: XOP). A bearish equivalent to XOP is the ProShares UltraShort Oil & Gas (NYSE: DUG). So rather than incur the cost and the risks of shorting DUG directly, it just makes more sense to go long DUG.
One of the more advanced concepts among ETF trading strategies is pairs trading, which is not be confused with forex pairs trading strategies. As an ETF trading strategy, pairs trading involves identifying sectors that are not too correlated to each other and shorting one while being long the other. A common approach would be to short financials as a hedge against long energy exposure. Short the Financial Select Sector SPDR (NYSE: XLF) while being long the Energy Select Sector SPDR (NYSE: XLE) and there you have an ETF trading strategy used by the pros.
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