ETF Investment Strategies

The expansion of Exchange Traded Fund (ETF) has triggered considerable changes in the capital investment arena. Similar to index funds, ETF is traded like stocks and has a 3-letter ticker signs. Since early 1990’s, exchange traded funds have been an investment strategy but only came to be popular and well understood recently. This has seen a major proliferation of exchange traded funds. To invest in them, a person needs to have some elementary knowledge of the Capital Asset Pricing Model methodology (CAPM) and some basic hedge fund techniques.

What exactly is an ETF?
ETF is a fund which is built as a basket of stocks that stands for a particular index, for example, Dow Jones select dividend index fund, Russell midcap growth index fund, etc. Most exchange traded funds give their attention to specific sectors or industry, for example healthcare, energy or biotechnology. There are exchange traded funds for commodities like gold, silver, oil as well as bonds and stocks in certain countries.

An ETF can be bought or sold at any time due to their liquidity. Exchange traded funds trade throughout the day on all major stock trading exchanges. There is no limitation on the number of shares that can be sold on bought in stock exchange markets. They are numerous exchange traded funds, for instance hedged funds, bundled, optioned, etc.

Exchange traded funds enable an investor to easily diversify, thus reducing single-stock exposure risk, and are also cheaper than similar conventional mutual funds. The annual management expenditure for exchange traded funds ranges from 0.1 % to 0.65% and are deducted from the dividends, while the traditional mutual fund index charges from 0.1% to even more than 3%.

Placing sector bets strategy
International exchange traded funds give the investor the exposure to trade in foreign stocks that can not be bought or sold in the United States stock market. For example, when Russia, China, India and Brazil were great places to invest in, there was exchange traded funds designed for that. Investors interested, for instance, in biotech, then they could invest in BBI. If they see promise and potential with technology, then they could take a chance in IYW or Dow Jones US technology sector.  Some exchange traded funds mimic the global agricultural, real estate or the environmental sectors.

Betting on bonds
An ETF will allow the investor to make bets on everything that can be traced by an index. Investment chances range from an exchange traded fund tracing such as ultra-broad Lehman aggregate bond index to ETFs focusing on inflation-protected treasuries or corporate bond indices. For instance, TIP is Tips Bond Fund which is an inflation protection strategy.

Investing in cash
If you are unsure of where to keep your ready cash, there are short term ETF bonds instead of investing in money market funds which pays poorly. However, the investor is best advised to first ask about the brokerage fees. Although there are some money market funds that make an investor pay early withdrawal charges, brokerage fees for selling your ETF bonds can be even higher.  The majority of people would rather invest their money in less risky items like stocks but still wants a higher return on their investment than what they can get from the money market. While at it, an investor may look into an exchange traded fund that incorporates laddered bonds; these are series of bonds that mature varyingly.

As compared to the conventional index funds, exchange traded funds are better as a long-term investment tool. Furthermore, with most investors, their investment strategy is to fill gaps in their portfolio and replacing mutual funds which becomes expensive.

Lastly, while it is easy to get lost in the formalities that are presented by the stock market, there is the potential to make a substantive monetary gain when you invest in exchange traded funds. Bearing this in mind, the ETFs will continue to grow in popularity because they allow the investor to make more money with their assets, rather than having them stay dormant. But before investing, do your homework and devise your own speculative methods to come up with the best ETFs to invest in.

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