• Skip to main content
  • Skip to secondary menu
  • Skip to primary sidebar
  • Skip to footer
  • HOME
  • RECOMMENDED BOOKS
  • FREE TOOLS
  • CONTACT US
  • ABOUT

The Fortunate Investor

Investing, Business & Personal Finance For Wealth Builders

  • Save Money
  • Invest Your Money
  • Get Out of Debt
  • Making Money Online
  • Family & Money
  • Taxes
  • Business
  • Retirement
    • Retirement Calculator
Home » What is an ETF and How Do You Trade Them

What is an ETF and How Do You Trade Them

December 15, 2019 By The Fortunate Investor | This article may contain affiliate links. For more information visit our Disclosure

Tweet
Share
Pin
Share
Share

An exchange traded fund (ETF) is a security that tracks the movements of an index, commodity or currency. 

types of ETFsAn ETF is a stock – like security that trades when a market is open and allows you to enter and exit at any point in time. ETFs are generally very liquid, but it is important for you to determine if you can exit or enter without experiencing significant difficulty. There are several strategies you can use to trade ETFs including fundamental, technical and pair trading strategies. ETFs are a good way for beginners to get started. Generally, they provide a lot of diversity in the market (such as S&P 500) at little to no cost in a brokerage account. Some ETFs of the broker even provide free trades for their own ETFs.

What is an ETF

An ETF is a security that tracks the movement of an underlying instrument. For example, if you purchase an ETF on the Dow Industrial Average, a 1% increase in the Dow Industrial average should coincide with a 1% increase in the ETF.  ETFs can be traded with leverage allowing you to trade leveraged ETFs that let you enhance your returns at 2 or even 3-times the rate of increase. For example, if you purchase a Dow Jones Industrial ETF with a leverage of 3:1, you should expect a return of 3% for every 1% rise in the Dow Jones Industrial Average. There are contracts for differences (CFDs) on ETFs that can provide leverage of up to 20:1.

The Benefits of Trading an ETF

ETF trading is usually very liquid allowing you to track an index, commodity or currency. While there are several ways to trade CFDs on commodities and currencies, there are very few ways to trade specific sectors. In addition to tracking large indices like the Nasdaq 100 or the S&P 500 index, ETFs can also track sectors such as the energy sector or the financial sector. Sector ETFs track a basket of stocks that participate in a specific sector. For example, the XLE energy ETF holds some of the largest oil and gas companies.  At any time, you can have exposure to upstream producers, downstream refiners and oil service companies. If you believe this sector will rise or decline, you can buy or sell an ETF that will track these movements.

Types of Strategies You can Use to Trade ETFs

ETF invest in stock marketSimilar to other trading strategies, you can use fundamental or technical analysis to drive your trading decisions.  The fundamentals can include the earnings in specific sectors, the macro events that effect broader markets or the supply and demand from commodities. The technical analysis you employ should be similar to the technical analysis you use on other instruments.

Additionally, you can pair trade using ETFs. This means you can purchase one ETF and simultaneously sell another ETF. This is a relative value style of trading. If you believe that Financials will outperform technology, you can purchase the XLF and sell the XLK. You can also back-test pairs to see when they outperform and use certain technical analysis techniques to back-test your pair trades. A good way to get started is by micro investing.

By trading ETFs, you can diversify your portfolio and locate specific assets that are on the move.  By using CFDs on ETFs, you can potentially enhance your performance by speculating on a leveraged position with regard to the performance of ETFs.

  • About
  • Latest Posts
The Fortunate Investor
The Fortunate Investor at FortunateInvestor.com
The Fortunate Investor is the finance half of the husband and wife duo behind this website. Michael's finance and investment advice is rooted in an MBA and 20 years experience as an entrepreneur, banker, and manager in the financial services industry.
Latest posts by The Fortunate Investor (see all)
  • The Bitcoin vs Gold Debate: Which is a Better Investment? - June 26, 2022
  • A Business Owner’s Guide to Hiring Freelancers - June 21, 2022
  • Top 3 Real Estate Investing Tips You Need to Know - June 3, 2022

Primary Sidebar

Popular Articles

bitcoin vs gold

The Bitcoin vs Gold Debate: Which is a Better Investment?

Are you interested in learning about the ongoing Bitcoin vs Gold debate? Investors looking for … Read More about The Bitcoin vs Gold Debate: Which is a Better Investment?

How to Take Care of Your Commercial Property

How to Take Care of Your Commercial Property

When you have a commercial property you need to make sure that you are always doing what is … Read More about How to Take Care of Your Commercial Property

How To Avoid Buyers Remorse When Purchasing Property

How To Avoid Buyers’ Remorse When Purchasing Property

Buying a home is a big investment, and if something goes wrong, it can have serious effects. This is … Read More about How To Avoid Buyers’ Remorse When Purchasing Property

A Business Owner's Guide to Hiring Freelancers

A Business Owner’s Guide to Hiring Freelancers

Did you know that an astounding 36% of US workers are now part of the gig (freelance) economy? If … Read More about A Business Owner’s Guide to Hiring Freelancers

Steps To Prioritize Employee Safety As A Business Owner

Steps To Prioritize Employee Safety As A Business Owner

Running a business involves taking on responsibility for the safety of employees and customers. If … Read More about Steps To Prioritize Employee Safety As A Business Owner

Footer

TOPICS

SAVE MONEY
INVEST MONEY
REDUCE DEBT
MAKE MONEY
FAMILY & MONEY
TAXES
START A BUSINESS
RETIREMENT

THE FORTUNATE INVESTOR

ABOUT US
ADVERTISE
CONTACT US

The Fortunate Investor focuses on personal finance topics to build wealth. Topics include saving money, investing, managing debt, family and money, taxes, making money, college planning, starting a business, coupons and retirement.

SOCIAL MEDIA

FACEBOOK
TWITTER
PINTEREST
INSTAGRAM
YOUTUBE

Copyright © 2022 Fortunate Investor. All Rights Reserved. | Disclaimer & Disclosure | Privacy Policy | Terms of Service