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10 Best ETF Trading Strategies
Trading
Demetris Makrides
July 22, 2024
Introduction
An exchange-traded fund, or ETF, is a basket of securities that tracks an index, sector, or other asset and trades on an exchange like a stock. ETFs allow investors to gain exposure to a wide variety of markets in a cost-effective, flexible way. However, ETFs can also be actively traded like stocks to profit from short-term price movements.
While ETFs are commonly used for long-term passive investing through dollar-cost averaging or buy-and-hold strategies, this article will focus on 10 effective trading strategies for capitalizing on their intraday price fluctuations. ETF trading differs from investing in that it aims to generate profits from both rising and falling prices using leverage. The aim is to equip readers with a variety of proven technical strategies for profiting from ETF price fluctuations.
What is an ETF?
An exchange-traded fund (ETF) is an investment vehicle holding assets such as stocks, bonds, commodities, or cash equivalents, and trades on an exchange similar to stocks. ETFs operate by tracking an underlying index or sector, with their price moving in line with the net asset value of the underlying securities.
Some key benefits of ETFs include
- Low costs — Most ETFs have low expense ratios, some less than 0.1% since they are passively managed and don’t require actively buying and selling their holdings.
- Diversification — They provide instant diversification across many stocks or bonds with a single trade.
- Flexibility — Investors can also gain exposure to diverse markets through specialized ETFs tracking sectors, countries, commodities and other niches.
Some popular ETF examples include
- SPDR S&P 500 ETF (SPY) which tracks the S&P 500 large-cap index
- Vanguard Total Stock Market ETF tracking the entire US stock market
- iShares MSCI Emerging Markets ETF provides exposure to emerging economies
- and the Invesco QQQ Trust tracking the Nasdaq 100
There are also bond ETFs like the iShares Core US Aggregate Bond ETF and sector ETFs targeting healthcare, real estate, financials and more. With over 5000 ETFs available globally on exchanges, investors and traders can construct nearly any portfolio or market view.
Investing vs Trading ETFs
ETF investing generally refers to a long-term buy-and-hold strategy focused on generating income and growth over many years. Common approaches include dollar-cost averaging to accumulate shares steadily and rebalancing periodically to maintain target asset allocation. Goals are usually retirement planning or wealth preservation.
In contrast, ETF trading aims to profit from short-term fluctuations in prices, which can rise or fall over days, weeks, or intraday. The objective is to optimise entry and exit points using techniques like technical analysis. Positions may be held from minutes to months depending on the strategy and market conditions.
While investing simply requires purchasing ETF shares, trading them successfully necessitates the use of leverage. With ETF price moves sometimes measured in cents per day or less, leverage amplifies potential profits by taking larger positions than account equity allows.
Without leverage, generating meaningful profits from frequent trading ETFs would be challenging given commission costs and the modest daily range of many funds. Leverage multiplies both profits and losses proportionally, unlocking opportunities even with small capital but increasing risk.
For these reasons, CFDs – which allow leveraged ETF trading without owning the underlying securities – are better suited than spot trading for implementing effective short-term ETF trading strategies seeking amplified risk-adjusted returns.
Key Factors to Consider When Trading or Investing in an ETF
Here are some key factors to consider when trading or investing in ETFs:
Trading volume — Make sure the ETF has adequate liquidity to allow entering and exiting positions without significantly moving the price.
Expense ratio — Lower fees leave more returns to the investor over the long run, so favour ETFs with reasonable ongoing costs.
Tracking error — For index ETFs, ensure the fund tracks its benchmark closely without significant divergence over time.
Holdings — Understand the companies/assets that make up the ETF and ensure they match your investment objective and risk tolerance.
Performance history — Review multi-year returns under different market conditions to gauge consistency and volatility.
Leverage — Consider an ETF’s use of leverage, which amplifies returns but also increases risk and can induce unpredictable reactions.
Spreads — Monitor bid-ask spreads, especially for less liquid ETFs, as these transaction costs eat into profits.
Diversification — Consider the ETF’s level of diversification – some are narrowly focused on sectors or regions.
Regulatory status — Verify the ETF and its issuer meet licensing, reporting, and operational standards in your jurisdiction.
ETF Investing Strategies
Common ETF investing strategies like dollar-cost averaging and asset allocation were covered earlier. Dollar-cost averaging calls for regularly purchasing set dollar amounts to accumulate shares over the long run at different price levels. Asset allocation aims to balance risk by diversifying across sectors, styles and asset classes.
Both approaches are better suited for passive buy-and-hold investors focused on income and wealth preservation over time, rather than active trading. Dollar-cost averaging is typically automated through periodic contributions and rebalancing ensures the initially targeted exposures are maintained despite fluctuating market values.
These hands-off styles don’t require closely tracking short-term price behaviour or timing entries and exits. They are better categorized as investing rather than active trading due to the intent to simply participate in long-term growth with minimal ongoing decisions. For traders wanting to capitalize on changing intraday, weekly or monthly price patterns, alternative strategies are better optimized.
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How To Invest ETFs
Here are the key steps to invest in ETFs:
Open a brokerage account — Choose a broker, typically an online broker, for trading ETFs. Look for low trading fees and commission costs.
Decide your investment goals and time horizon — Determine if you want income, growth, or a balance. Decide how long you can invest for – years or decades make ETFs suitable.
Choose your ETFs — Research top ETFs by categories like index, region, sector or asset type. Evaluate factors like costs, holdings, and track record.
Establish your asset allocation — Diversify your investments across various asset classes like stocks and bonds based on your risk profile.
Dollar-cost average — Contribute a set amount regularly to buy more ETF shares when prices are lower and fewer when higher.
Automate your purchases — Set up automatic contributions from your bank if possible to stay disciplined and reduce transaction fees.
Rebalance periodically — Adjust your allocation back to initial targets as some ETFs outperform others over time.
Monitor your portfolio and make changes as needed — Replace underperforming ETFs, alter your allocation as needs change, and monitor costs and diversification.
Consider your dividends — Many ETFs pay dividends, so understand if you want cash or dividend reinvestment.
Keep a long-term perspective — Unless circumstances change, buy and hold ETFs for years to maximally benefit from long-term compounding returns.
Why CFDs are Best for ETF Trading
A contract for difference, or CFD, is a leveraged derivative contract that allows traders to speculate on rising or falling prices without physically owning the underlying asset. With a CFD, the trader enters an agreement to exchange the difference between the opening and closing prices of a CFD contract, multiplied by the number of units stipulated in the agreement.
Importantly, CFDs offer leveraged exposure, meaning traders can open positions that are worth many times their initial investment. Leverage magnifies both profits and losses proportionally according to the leverage multiple used, so traders must risk capital justified by their individual risk tolerance and strategy edge.
When trading ETFs via CFDs, traders can control large whole shares or dollar values of ETFs while only depositing a fraction as an initial margin. For example, with 2:1 leverage a trader could secure a $10,000 ETF position by depositing just $5,000 in their account. This allows for generating meaningful profits from small price moves that may not be possible when trading the ETFs directly.
Additionally, unlike physically holding ETF shares, CFD positions do not incur the stamp duty, taxation or dividend adjustments of actually owning the underlying. There are no restrictions on shorting ETFs, providing versatility to both bullish and bearish views.
Options and futures contracts provide leveraged exposure too but involve expiration dates, specific pricing mechanisms, and physical delivery risks that make them better for long-term investing rather than nimble, short-term ETF trading. CFDs remove these obstacles to facilitate technically analyzing and constantly adapting positions based on price action.
10 Best ETF Trading Strategies
Trend Following
Trend following is a simple yet effective ETF trading strategy that aims to profit from the dominant price trends in markets. It looks to enter long positions in uptrending ETFs and short those trending downward. Traders analyze indicators like moving averages to identify changes from short-term to intermediate-term trends and trade in the direction of the higher time frame momentum.
A common approach is using a crossover system with a 50-day and a 200-day moving average, going long on a 50-day crossing above the 200-day and closing positions or shorting on a bearish crossover. With CFD leverage, traders can capitalize on even small trending moves over weeks or months. Risk is managed through automatic stops if the trend reverses against open positions.
Trend following is well-suited to CFD trading due to its longer-term focus. Leverage amplifies profits from major trending days while allowing partial position reductions on profit-taking pullbacks. Traders can research sectors and global markets to identify developing trends across diverse ETF themes. While whipsaws may occur during trend pauses, persistence with position sizing for risk tolerances is important.
Swing Trading
Swing trading aims to profit from medium-term price swings within ongoing trends, typically holding positions from a few days to several weeks. Technical indicators help identify levels where ETFs repeatedly bounce between support and resistance, signalling potential turning points.
A common swing trading setup scans for upper and lower Bollinger Band bounces combined with moving average crossovers. Entry might be on a close outside the bands accompanied by bullish MACD crosses while taking partial profits on the approach back inside and exiting fully on an outside band break.
CFDs facilitate swing trading by allowing partial profit-taking without closing full positions. Their low margin requirements also mean traders can hold several swing trade candidates simultaneously. Risk management involves trailing stops that evolve with the trade, securing profits while allowing winners to fully materialize.
Day Trading
Day trading aims to benefit from short-term intraday price fluctuations through positions held in just minutes or hours. While requiring close monitoring, it benefits advanced traders analyzing recurring supply and demand zones.
With CFD leverage, day traders can capitalize on even tiny ETF moves exceeding commissions. A common approach scans for retracement levels from daily and hourly pivots, entering breakouts for anticipated continuation. Break-even stops allow for preserving profits as targets are tested.
News events and economic releases cause reliable ETF volatility during certain windows. Traders follow financials before bank results or tech ahead earnings to anticipate reactions. Scalping setups may enter breaking ranges or retraces toward moving averages. CFDs are ideal as day traders can access these fleeting moves.
Scalping
Scalping is an ultra-short-term day trading technique seeking to profit from tiny sub-1% ETF price fluctuations. It requires rapid entry and exits, often holding positions just minutes before taking profits. With high-frequency monitoring and speedy order execution, scalpers capitalize on brief imbalances.
A scalping setup spots ETF order flow momentum shifts using tick charts in under 5 minutes. Signals include breakouts of tight 1-2 point ranges or bouncing off moving average or pivot levels. Traders use heavy leverage like 5:1 to make these micro-moves worthwhile and profitable.
Time is critical – scalpers monitor several ETFs simultaneously, exciting wins quickly to 5-10 ticks profit targets or breakeven on losses. Risk controls involve position sizing for maximum daily loss tolerance. Fundamental news is unimportant – it’s purely technical and quantitative.
CFDs are ideal as they don’t burden scalpers with commission costs and withdrawals are fast. Leverage gains outweigh costs facilitating high-frequency short-term ETF fluctuations with small bets. Discipline and experience are imperative to surviving inevitable short-lived losses.
Hedging
Hedging protects ETF portfolio exposures using opposite CFD trades. It’s vital for traders anticipating sharp market turns or volatility spikes jeopardizing their positions. Hedging offsets risk rather than speculating directionally.
Pair trades hedge one ETF against another relating but reacting inversely. An S&P 500 long holding may short Nasdaq ETFs if anticipating a tech bubble correction. Commodity shorts could hedge long energy stocks on supply concerns. Gold holdings may short treasury ETFs as they often diverge.
Futures also hedge portfolios, like shorting /ES CFDs against long large-cap holdings on downside views. Leveraged bear ETF longs counter bullish single-name stocks if foreseeing declines. Outright volatility trades utilizing CFDs on VXX inverse its VIX level approaches.
Arbitrage
Arbitrage exploits ETF pricing anomalies within and between exchanges seeking riskless gains. Intra-arbitrage involves liquidity providers mechanically profiting from brief creation-redemption price spreads. Inter-market arbitrage focuses on persistent deviations in identical ETF listings across regions.
Traders monitor ETF arbitrage tools for cross-exchange opportunities, entering the lower-priced market and shorting the dearer. Leveraged CFDs enhance profits as price convergence eliminates the bet. For instance, European and US-listed iShares MSCI Emerging Markets ETFs sometimes differ, enabling risk-free arbitrage trades.
News Trading
News trading grounds positions on upcoming ETF-moving announcements like economic reports, central bank meetings and corporate earnings. It involves researching anticipated reactions, entering beforehand and exiting rapidly on release.
Traders continually track business news to identify expected market-moving events. They analyze previous reactions, and broader trends and research economists’ forecasts to determine likely price action. CFDs facilitate swift entries scalping runs into and out of the news.
For example, non-farm payrolls are known as moving SPY and sector ETFs, with clear overbought/oversold levels. Traders may enter retracements a few hours in advance, tightening stops awaiting the volatile 2-minute window. Leverage amplifies gains as volatility decays immediately post-release if proven accurately. Disciplined risk controls protect against surprises.
Betting on Seasonal Trends
Seasonal patterns influence certain ETFs, enabling trend betting. Commodities like gold often rise into October on increased Asian demand preceding festivals. Short winter-month drops in natural gas and oil stocks due to declining demand also recur reliably.
Traders research historical seasonal tendencies, structuring entries and targets. For gold, going long a bullion ETF in September and aiming for October strength worked recently. Shorting energy sectors from November–January paid as demand fell.
Though predictable on average, all trends randomly fail occasionally. Trend betting still involves risk and demands experienced traders prepared to accept loss years to permit others’ gains. Portfolio diversification mitigates dangers and takes partial profits hedges against surprises.
Trading Around Key Events
Anticipating ETF reactions to scheduled events lets traders actively position ahead through catalyst volatility. Quarterly earnings profoundly swing certain sectors, often compressing wild days of movement into hours.
Studying prior earnings impacts and optionality chains reveals likely post-print moves. Traders enter an ETF that plays pre-market holding through the reaction seeking explosive upside breakouts or quick downside collapses facilitated by CFD leverage.
Timing, experience and understanding an event’s importance are crucial to succeeding. But successful catalysts unlock outsized leverage-enhanced rewards from fleeting volatility windows with rational risk management.
Sector Rotation
Rotating between high-potential sectors exploits relative strength and weakness changes. Markets move in cycles, and leadership constantly transfers between groups. Identifying trending sectors and exiting lagging ones optimizes exposures.
Traders analyze industry rotation using indicators like relative performance lines plotted between ETFs. Crossing above resistance signals a new group’s strength and suggests profit-taking in the prior out-performer.
Leveraged CFD positions afford to amplify returns by aggressively overweighting identified rotation candidates. Simultaneous shorting of prior out-performers hedges the rotation bet. Comprehensive technical and macro evaluation of sector fundamentals fuels accurate rotational calls.
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How to trade ETFs
Here are the key steps to trade ETFs:
Open a brokerage account for trading — Look for platforms best suited for active trading with low commissions and robust charting/analysis tools.
Choose ETFs to trade — Research liquid ETFs tracking areas you understand with adequate volume for entries/exits.
Choose a strategy and develop a plan — Decide approaches like day trading, swing trading, and range trading based on your goals, schedule and risk tolerance.
Set up a demo account — Practice your strategy, tools and money management on a simulation balance to test your skills.
Understand technical analysis — Learn indicators and patterns for identifying strong setups and exits like moving averages, Bollinger Bands, and pivot points.
Determine trade management rules — Define risk controls like stop losses, and volume/price triggers for partial or full closure.
Only trade with risk capital — Never risk funds you may need, and use a small percentage of your portfolio per trade.
Monitor your positions closely — Be ready to close deals not progressing as planned or if conditions change against you.
Review each trade outcome — Assess what went well and flaws to improve your strategy and emotional discipline.
Constantly develop your skills — Learn from educational sources and experienced traders to progressively refine your approach. Paper trade new ideas first.
Final Thoughts
While day trading ETFs successfully necessitates diligent effort, utilizing leverage through CFDs and developing a tested technical strategy backed by ongoing education, it can provide experienced traders opportunities to generate consistent profits from short-term price fluctuations.
Traders must approach ETF trading in a structured manner by starting small, focusing on liquid funds, managing risk appropriately, learning from their trades, and always striving to improve – if done responsibly with these best practices in mind, it has the potential to complement long-term investment holdings.
Updated:
August 13, 2024 
