Did you know that the main purpose of an ETF (Exchange-Traded Fund) is to replicate the performance of an underlying asset such as a stock index? This industry has grown significantly to provide savers, traders, and investors with easy access to financial markets and in particular to specific industries such as artificial intelligence, robotics, alternative energies, commodities, currencies, and more.
The strong growth of the ETF industry can be illustrated by the total amount of assets under management. Indeed, this amount has grown from $417 billion in 2005 to $4.69 trillion in 2018. This is just one of the many reasons why more and more traders and investors are learning more about ETF strategies, which is also why you should do the same.
What are ETFs?
Exchange-traded funds or ETFs (also called trackers or index funds) are a category of financial products. They were created in 1990 in Canada to replicate the performance of a specific stock index.
For example, the Vanguard S&P 500 UCITS ETF aims to replicate the performance of the S&P 500 stock index. Over time, the ETF industry has grown considerably, allowing investors to access financial markets that would otherwise be inaccessible to them.
For example, if an investor is interested in the growth of artificial intelligence (AI), they do not need to do a lot of research to find the right company or companies to invest in.
Instead, they can simply learn about the Global X Robotics & Artificial Intelligence ETF and see if it fits their needs. This is because this ETF invests in companies that stand to benefit from the increased adoption and use of robotics and AI.
ETFs can be traded on different exchanges around the world, such as the New York Stock Exchange or the Paris Stock Exchange. Therefore, an ETF can be bought and sold during the trading hours of a stock exchange, just like shares of a publicly-traded company.
What is an ETF Strategy?
Developed by traders and investors, an ETF investment strategy is a methodology that aims to select the best funds to invest in, meeting their individual needs. In other words, this methodology helps make buy or sell decisions based on specific tools and key data.
The methodology typically involves different types of analysis, often derived from technical analysis and fundamental analysis.
✅ Technical analysis: This type of analysis involves studying historical stock price movements to predict the future direction in the short to medium term. Many traders also use technical indicators such as moving averages or the stochastic oscillator on the price chart of the ETF they wish to analyze. These indicators can help them identify price patterns that translate into buying or selling opportunities. You can learn more about technical analysis strategies later in this article when we discuss investment strategies for ETFs.
✅ Fundamental analysis: As the name implies, this type of analysis looks at fundamentals such as changes in global economic activity, central bank policies, and macroeconomic indicators. These indicators can be used to identify changes in trends in the global economy, technology, or even climate.
Most traders and investors combine technical analysis with fundamental analysis. However, more short-term traders such as day traders, who only keep their positions open for a few minutes or hours, focus more on investment strategies that only take into account technical analysis.
Fortunately, the same technical analysis tools used to trade financial markets such as forex, commodities, and stocks can also be used for ETFs.
How do I start trading an Exchange-Traded Fund Strategy?
Before moving on to strategies to start investing in ETFs, it is essential to have the right trading tools at your disposal from the start.
1. Choose the right broker
Investing in ETFs is very similar to investing in stocks. If you want to buy shares of a publicly traded company such as Apple, for example, you need to find someone who not only owns Apple shares but is also willing to sell them to you. This is where the broker comes in; he does this work for you.
Through the trading platform connected to your broker, your broker matches your buy and sell orders with those of other buyers and sellers through the exchange that lists the ETFs and shares of the company you want to buy or sell.
With a quality broker, you can buy and sell ETFs in seconds without having to meet the person on the other side of the transaction. It is important to understand that the broker you choose holds the funds that you use to trade and invest. It is therefore essential to choose a serious and regulated broker, offering the best possible security conditions and the highest possible safety.
2. Use the best trading platform for ETFs
Your trading platform gives you access to the essential information you need to invest in ETFs. This includes market news, historical price charts, current quotes, and technical indicators.
Trading Strategies to Consider
Below are three strategy ideas to get you started trading and investing in ETFs.
1. Invest in the stock market and its various sectors with ETFs
Among the different ways to invest with ETFs, the most popular investment strategy is to gain exposure to the equity markets.
For example, if an investor has a positive, and therefore bullish, outlook on the U.S. equity market, then he or she can simply buy the Vanguard S&P 500 UCITS ETF. This ETF replicates the performance of the S&P 500 stock index and therefore allows an investor to have a diversified portfolio using a single financial product, in this case, an ETF.
However, investing in an ETF that replicates the performance of a stock index is not the only solution available to investors. Indeed, ETFs can also provide exposure to specific sectors.
This is how most American companies are categorized; by industry. These include retail, consumer discretionary, consumer staples, energy, technology, materials, healthcare, and many others.
For example, an investor may want to expose a portion of his portfolio to the healthcare sector through an ETF strategy. Instead of choosing a single company from this sector, another option is to go with the Health Care Select Sector SPDR Fund ETF (XLV).
2. Invest in commodity ETFs
With commodity ETFs, investors can gain exposure to a wide range of assets such as metals, agricultural and energy commodities, and more. For example, if an investor wants to protect a portion of their capital over the long term with a haven asset such as gold, then rather than buying gold bars, they can simply invest in a haven ETF.
3. Access international markets (ETFs on emerging markets)
With ETF strategies, traders and investors can expose part of their capital to markets that would otherwise be inaccessible to them. Emerging market ETFs have gained significant popularity as many investors have become interested in the growth prospects of these countries.
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