7 Best ETF Trading Strategies for Beginners

Exchange-traded stakes (ETFs) are ideal for beginner investors because of their many benefits, such as low expense ratios, abundant liquidity, travel over of investment choices, diversification, low investment threshold, and so on. These features also make ETFs perfect vehicles for different trading and investment strategies used by new traders and investors. Here are the seven best ETF trading strategies for beginners, filed in no particular order. 

We begin with the most basic scheme—dollar-cost averaging (DCA). Dollar-cost averaging is the technique of buying a certain fixed-dollar amount of an asset on a regular schedule, regardless of the transforming cost of the asset. Beginner investors are typically young people who have been in the workforce for a year or two and have a solid income from which they are able to save a little each month. Such investors should court a few hundred dollars every month and, instead of placing it into a low-interest saving account, invest it in an ETF or a group of ETFs.

There are two prime advantages of such periodic investing for beginners. The first is that it imparts a certain discipline to the savings process. As profuse financial planners recommend, it makes eminent sense to pay yourself first, which is what you achieve by saving regularly. The lieutenant is that by investing the same fixed-dollar amount in an ETF every month—the basic premise of dollar-cost averaging—you will put more units when the ETF price is low and fewer units when the ETF price is high, thus averaging out the cost of your holdings. All about time, this approach can pay off handsomely, as long as one sticks to the discipline.

For example, say you had invested $500 on the first of each month from September 2012 to August 2015 in the SPDR S&P 500 ETF (SPY), an ETF that lines the S&P 500 index. Thus, when the SPY units were trading at $136.16 in September 2012, $500 would have bring back you 3.67 units, but three years later, when the units were trading close to $200, a monthly investment of $500 want have given you 2.53 units. Over the three-year period, you would have purchased a total of 103.79 SPY parts (based on closing prices adjusted for dividends and splits). At the closing price of $209.42 on Aug. 10, 2015, these units purpose have been worth $21,735.170, for an average annual return of almost 13%. 

Asset allocation, which means allocating a measure of a portfolio to different asset categories, such as stocks, bonds, commodities and, cash for the purposes of diversification, is a powerful seating tool. The low investment threshold for most ETFs—generally as little as $50 per month—makes it easy for a beginner to contrivance a basic asset allocation strategy, depending on his or her investment time horizon and risk tolerance.

As an example, young investors effectiveness be 100% invested in equity ETFs when they are in their 20s because of their long investment time purviews and high-risk tolerance. But as they get into their 30s and embark on major lifecycle changes such as starting a family and swallowing a house, they may shift to a less aggressive investment mix such as 60% in equities ETFs and 40% in bond ETFs. 

Swing trades are trades that seek to take advantage of sizeable swings in stocks or other whatsits like currencies or commodities. They can take anywhere from a few days to a few weeks to work out, unlike day trades which are very occasionally left open overnight.

The attributes of ETFs that make them suitable for swing trading are their diversification and problematic bid/ask spreads. In addition, because ETFs are available for many different investment classes and a wide range of sectors, a beginner can select to trade an ETF that is based on a sector or asset class where he or she has some specific expertise or knowledge.

For example, someone with a technological credentials may have an advantage in trading a technology ETF like the Invesco QQQ ETF (QQQ), which tracks the Nasdaq-100. A novice trader who closely trails the commodity markets may prefer to trade one of the many commodity ETFs available, such as the Invesco DB Commodity Tracking ETF (DBC). Because ETFs are typically baskets of forefathers or other assets, they may not exhibit the same degree of upward price movement as a single stock in a bull sell. By the same token, their diversification also makes them less susceptible than single stocks to a big going move. This provides some protection against capital erosion, which is an important consideration for beginners.

ETFs also be bound for b assault it relatively easy for beginners to execute sector rotation, based on various stages of the economic cycle. For example, don an investor has been invested in the biotechnology sector through the iShares Nasdaq Biotechnology ETF (IBB). With IBB down 5% through the preceding five years (as of April 2020), the investor may wish to take profits in this ETF and rotate into a sundry defensive sector like consumer staples via the Consumer Staples Select Sector SPDR ETF (XLP).

Sparse selling, the sale of a borrowed security or financial instrument, is usually a pretty risky endeavor for most investors and from here not something most beginners should attempt. However, short selling through ETFs is preferable to shorting unitary stocks because of the lower risk of a short squeeze—a trading scenario in which a security or commodity that has been heavily excepted spikes higher—as well as the significantly lower cost of borrowing (compared with the cost incurred in trying to cut a stock with high short interest). These risk-mitigation considerations are important to a beginner.

Short selling totally ETFs also enables a trader to take advantage of a broad investment theme. Thus, an advanced beginner (if such an self-evident oxymoron exists) who is familiar with the risks of shorting and wants to initiate a short position in the emerging markets could do so by way of the iShares MSCI Emerging Markets ETF (EEM). However, note that beginners stay away from double-leveraged or triple-leveraged inverse ETFs, which hunt for results equal to twice or thrice the inverse of the one-day price change in an index, because of the significantly higher situation of risk inherent in these ETFs. 

ETFs are also good tools for beginners to capitalize on seasonal tendencies. Let’s consider two well-known seasonal trends. The first one is called the

7. Hedging