Why ETFs Should Be Part Of Your Portfolio

The demand for exchange traded funds (ETF’s) grows each year. There are almost 1,000
ETFs available to trade covering almost any asset class imaginable. Some of the larger ETFs are offered by ProShares, IShares, and the SPDRs. There are many ways a sound stock trading systems could incorporate the benefits of ETFs.

There are many reasons for the increased popularity of exchange traded funds. The primary attraction may be that ETFs are considered less risky than individual equities. Because ETFs are a basket of underlying securities the business risk of single stock exposure is reduced. There’s no chance of corporate wrongdoing affecting an ETF like it would an individual stock.

Other benefits of investing with ETF’s are:

• The market can be traded on both the long and short side. This expands the opportunity for profits because an investor can gain from a rising and a declining market.

• Some ETF’s are leveraged. More aggressive traders like the idea of increased leverage. There are now ETF’s with not just double the added leverage, but also triple.

• The capability to trade multiple markets is possible. Oil, gold, silver are some of the possible commodity ETFs. World markets are accessible – country specific investments like: Brazil, China, Japan, etc.

• The currency market is available with many ETFs -- there is likely an ETF for all major world currencies.

• Option trading --just as with stocks the same option strategies can be applied to ETFs.

• Portfolio diversification is simple given the multitude of asset classes, sectors, countries, and currencies represented by exchange traded funds.

• ETFs are not only popular with the investing public, but also with hedge fund managers and day traders. One of the reasons, besides being great trading vehicles, is that they are useful as hedging vehicles.. Hedging with ETFs can protect the profits in a portfolio and it can be accomplished inexpensively.

As with single stocks, technical analysis strategies are suitable to ETFs. It’s possible to successfully use trend following indicators and oscillators. Charting the price movement is no different than graphing a stock. The major index ETFs move very smoothly and are great vehicles to trade. An active trader could make a good living trading only index ETFs.

One warning – note the volume on each individual exchange traded fund. Many like the SPY, QQQQ, DUG, and DIG have lots of volume. Some of the more obscure, like some sector ETFs are thinly traded and should be avoided.