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ETFs (exchange-traded funds) are similar to mutual funds, but they trade like stocks. ETFs have exploded in popularity due to their easily accessible asset diversity and often low expense ratio.
If you're new to the world of exchange traded funds, there are some important ETF-specific considerations to keep in mind.
Learning about ETFs is essential and, despite what you might think, isn't hard at all. Though a little dry, the best information about an ETF comes from the company that maintains it. All investors (and even people who aren't investors) are entitled to a copy of the ETF's prospectus for review.
Prospectuses contain important information regarding the historical performance of the ETF, its holdings, and important risk information. The prospectus should always be the first step in your due diligence process considering an ETF as an addition to your portfolio.
Additionally, while many ETFs are fairly straightforward, there are some that are quite unique. Some use leverage, some use a heck of a lot of leverage, and others are restricted to specific industries.
The Aberdeen Standard Physical Precious Metals ETF (NYSE: GLTR), for example, is a direct investment in physical precious metals instead of mines or sellers. This leads to a higher expense ratio and unique exposure to a blend of precious metals that can be purchased with a single ticker symbol.
Understanding exactly what it is you are buying is key to understanding how it might respond to macroeconomic trends and how it interacts with the other assets in your portfolio.
ETFs Can Be Good Swing Trading Candidates
Some ETFs are good swing trading candidates. A low volatility ETF such as Investco's S&P 500 Low Volatility ETF (NYSE: SPLV) is not a good candidate for swing trading.
SPLV is an ETF that is built around reducing beta, or volatility, and as a result it doesn't often present wild enough price swings to make it attractive to swing traders.
The Direxion Daily Junior Gold Mine leveraged ETF (NYSE: JNUG) on the other hand is much more prone to exaggerated price swings due to its leveraged nature. As a 2x play on gold, JNUG can be as risky as it can be profitable in the right hands.
ETFs Present An Easy Sector Rotation Tool
Due to the thematic nature of many ETFs it is easy to rotate through sectors as the economic business cycle marches on. As a brief refresher, cyclical stocks are stocks that track the business cycle. When the economy is peaking or expanding, so are they.
On the other hand, countercyclical stocks are negatively correlated with the business cycle. They are at their peak when the economy is contracting.
You can see the general shape of the business cycle as it moves from boom to bust, then back to boom again, in the image below.
Be wary, however. It is common knowledge that even dedicated investors who try to time the market in this way stand just as high a chance of running afoul of historical performance as they do of bucking the trend.
Above All - Choose A Reliable Trading Platform
If you know the basics of trading, you are likely already aware that choosing a reliable online trading platform is the first, and most vital, step toward success.
Look for features like discounted or commission-free trades, extended trading hours, access to more markets, instant deposits, and mobile apps or other accessibility functions.
An investor is only as good as their tools.