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TABLE OF CONTENTS
1-) Cost-per-dollar averaging 
2-) Allocation of Assets 
3-) Swing Trading
4-) Sector Rotation
5-) Short Term Investments
6-) Seasonal Trend Betting 
7-) The Bottom Line: Hedging 

 

Because of their many advantages, such as low expense ratios, ample liquidity, a wide range of investment options, diversification, and a low investment threshold, exchange-traded funds (ETFs) are perfect for new investors. ETFs are also ideal vehicles for a variety of trading and investment strategies employed by beginner traders and investors because of these characteristics. The seven finest ETF trading methods for novices, in no particular order, are listed below. 

 

TAKEAWAYS IMPORTANT 


ETFs, or exchange-traded funds, are becoming increasingly popular among traders and investors as a way to participate in large indices or sectors in a single investment. 


In addition to ETFs, there are leveraged investments that return a multiple of the underlying index, as well as inverse ETFs that rise in value when the index declines. 


Several tactics can be employed to maximize ETF investing due to their unique character.


1-) Cost-per-dollar averaging 


The most fundamental method is dollar-cost averaging. The strategy of buying a certain fixed-dollar amount of an asset on a regular basis, regardless of the item's fluctuating cost, is known as dollar-cost averaging. Beginner investors are often young adults who have worked for a year or two and have a steady salary from which they may save a little amount of money each month. 

Such investors could set aside a few hundred dollars each month and invest it in an ETF or a collection of ETFs rather than a low-interest savings account. 

 

Advantages 


For beginners, there are two significant benefits to investing on a regular basis. The first is that it makes the savings process more disciplined. It makes sense, as many financial advisers advise, to pay yourself first, which you can do by saving regularly. 

The second benefit is that by investing the same fixed amount in an ETF every month—the basic principle of dollar-cost averaging—you will accumulate more units when the ETF price is low and fewer units when the ETF price is high, average out your holdings' costs. If one sticks to the discipline, this strategy can pay off handsomely over time. 

For example, suppose you put $500 in the SPDR S&P 500 ETF (SPY), an ETF that tracks the S&P 500 Index, on the first of every month from September 2012 to August 2015. 

 

Thus, in September 2012, when the SPY units were trading at $136.16, $500 would have gotten you 3.67 units, but three years later, when the units were trading around $200, $500 would have gotten you 2.53 units. 

You would have acquired a total of 103.79 SPY units over the three-year period (based on closing prices adjusted for dividends and splits). These units would have been worth $21,735 at the closing price of $209.42 on Aug. 14, 2015, for an average yearly return of about 13%.

 

2-) Allocation of Assets 


Asset allocation, or assigning a percentage of a portfolio to other asset categories for diversification purposes (such as stocks, bonds, commodities, and cash), is a valuable financial technique. Because most ETFs have a low investment threshold, a newbie can easily apply a basic asset allocation strategy based on their investment time horizon and risk tolerance. 

Because of their extended investing time horizons and high-risk tolerance, young investors may be fully invested in equities ETFs when they are in their 20s. However, as people enter their 30s and make major life changes such as raising a family and purchasing a home, they may switch to a less aggressive investing mix, such as 60% equities ETFs and 40% bond ETFs. 

 

3-) Swing Trading 


Swing traders seek to profit from large movements in stocks or other financial assets such as currencies or commodities. Unlike day transactions, which are rarely left open overnight, they can take anywhere from a few days to a few weeks to work out. 

Diversification and tight bid/ask spreads are two characteristics of ETFs that make them appropriate for swing trading. Furthermore, because ETFs are accessible for a variety of investment classes and sectors, a novice might choose to trade an ETF based on a sector or asset class in which they have specific skills or understanding. 

Trading a technology ETF like the Invesco QQQ ETF (QQQ), which tracks the Nasdaq-100 Index, for example, may benefit someone with a technological background. 

 

A rookie trader who closely follows commodities markets may want to trade one of the many commodity exchange-traded funds (ETFs), such as the Invesco DB Commodity Index Tracking Fund (DBC). 

Because ETFs are often baskets of stocks or other assets, they may not move as much as a single stock in a bull market. Similarly, their diversification makes them less vulnerable to a large downward fall than single stocks. This protects against capital degradation, which is a crucial factor for novices. 

 

4-) Sector Rotation

ETFs make sector rotation for novices very simple, based on various periods of the economic cycle. Assume an investor has purchased the iShares Nasdaq Biotechnology ETF to invest in the biotechnology industry (IBB). 5 Take profits in this ETF and switch to a more conservative sector, such as consumer staples, via The Consumer Staples Select Sector SPDR Fund (XLP).

 

5-) Short-Term Investments 


Short selling, or the sale of a borrowed security or financial instrument, is usually a dangerous venture for most investors, and not something most beginners should try. Short selling through ETFs, on the other hand, is preferred to shorting individual equities because of the lower danger of a short squeeze—a trading scenario in which a heavily shorted securities or commodity rises higher—as well as the substantially lower cost of borrowing (compared with the cost incurred in trying to short a stock with high short interest). For a newbie, these risk-mitigation measures are crucial. 

 

A trader can potentially take advantage of a wide investment trend by selling short using ETFs. As a result, an advanced novice (if such an oxymoron exists) who is knowledgeable with the hazards of shorting and wishes to start a short position in emerging markets could use the iShares MSCI Emerging Markets ETF (EEM). 7 Beginners should avoid double-leveraged or triple-leveraged inverse ETFs, which seek results equal to twice or three times the inverse of a one-day price change in an index, due to the much higher level of risk involved. 

 

6-) Seasonal Trend Betting

ETFs are also a wonderful way for novices to profit from seasonal trends. Let's take a look at two well-known seasonal patterns. The first is known as the "sell in May and leave" phenomenon. It refers to the fact that, historically, U.S. equities have underperformed over the six-month period of May-October when compared to the November-April timeframe. 

The other seasonal trend is for gold to rise in September and October as a result of increased demand from India ahead of the wedding season and the Diwali festival of lights, which falls between mid-October and mid-November. 

 

Shorting the SPDR S&P 500 ETF around the end of April or the beginning of May and completing the short position in late October, right after the market swoons typical of that month have occurred, can take advantage of the broad market downturn trend. 

A novice can profit from seasonal gold strength by purchasing units of a prominent gold ETF, such as the SPDR Gold Trust (GLD), in late summer and closing the position after a few months. 

It's important to remember that seasonal trends don't always go as expected, so using stop-loss orders to limit the danger of huge losses is usually a good idea. 

Hedging is number seven. 
In a large portfolio, such as one acquired as a consequence of an inheritance, a newbie may need to hedge or protect against downside risk on occasion. 

 

Assume you've inherited a sizable portfolio of U.S. blue chips and are anxious about the possibility of a significant drop in the stock market. Purchasing put options is one option. Because most beginners are unfamiliar with option trading tactics, another alternative is to open a short position in broad market ETFs such as the SPDR S&P 500 ETF or the SPDR Dow Jones Industrial Average ETF (DIA).

If the market falls as projected, your blue-chip equities position will be adequately hedged because the gains in the short ETF position will cover the losses in your portfolio. If the market rises, your gains will be constrained as well, because gains in your portfolio will be offset by losses in the short ETF position. ETFs, on the other hand, provides a reasonably simple and effective technique of hedging for beginners. 

 

The Bottom Line

ETFs have a number of characteristics that make them suitable products for new traders and investors. Dollar-cost averaging, asset allocation, swing trading, sector rotation, short selling, seasonal patterns, and hedging are some ETF trading methods that are especially ideal for beginners.


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