1. ETFs trade almost like a stock
Unlike mutual funds or hedge funds which can only be entered or exited at the market close each trading day, ETFs can be bought and sold intraday. They can even be day traded just like stocks. This advantage allows investors to make speculative bets on the direction of an index while still having the ability to exit the trade at any time of the day. ETFs also allow short selling, as well as often being optionable.
One of the main benefits of trading ETFs is diversification. ETFs were created to track an index, be that a stock index, commodity index, currency index, or almost any other type of security index. The advantage of trading an index is that you are shielded from the volatile up and down swings of a given individual security.
There are many funds that are highly liquid. The QQQQ fund (follows the Nasdaq-100 Index) has an average daily trade volume of over 164 million shares and over 75 other funds have an average daily volume of more than 1 million shares.
Liquidity is important to get in or out of a position quickly. There are a lot of other buyers and sellers to facilitate your trades as opposed to relying on market makers to do everything for you. If you are trading options on the funds, many of these also have highly liquid options.
4. Low Bid/Ask
As a result of high liquidity, many ETFs have low bid/ask spreads. A high bid/ask spread can cut into your trading profits. Most of the highly liquid ETFs have a bid/ask spread of only a few cents during the trading day.
Whichever sector of the market interests you, you can probably find an ETF for it. There are major index funds such as the QQQQ and SPY as well as sector funds such as XLF (Financials), international funds such as EEM (Emerging Markets).
In addition to sector specific, fund companies are continually introducing "Ultra" and "Inverse" ETFs. "Ultra" ETFs are leveraged funds in which the returns of the fund are double that of the index. For example, if an ETF is up 10% for a given year, then the Ultra ETF for that same index would be up around 20% in the same year. Keep in mind that this leverage can work for you, as well as against you.
"Inverse" ETFs are funds which move in the opposite direction of the underlying index. So if the S&P 500 Index is down 8%, then the inverse ETF for the S&P would be up 8%. To further increase your investing options, some ultra ETFs are also inverse funds as well.
6. Low Expense Ratios
ETFs have much lower expense ratios than mutual funds or hedge funds. This means that more of your money stays in the investment rather than going to the firm that is maintaining it.
Some believe Exchange Traded Funds will become the primary investment instrument for most investors largely leaving mutual funds behind. This growth is demonstrated by the increasing availability of ETF options.
The benefits of ETFs speak for themselves, that why I decided to devote all of my time to trading ETFs. These are interesting and volatile times in the markets today. People looking to retire in the next five years have had to change their plans. Investing in ETFs creates diversity in an active investor’s portfolio and reduces the risks of market trading. The focal point of ETFTRADR ETF Elements is to provide quality education to help both longer-term investors and active traders take advantage of proven patterns in ETFs giving traders a clearly defined edge that creates opportunities for those in the know.
** This article is contributed independently by Andrew Hart of ETFTRADR.com. MarketHEIST is not responsible for the views and comments made.