Exchange Traded Funds Mimic a Market or Industry Index.
Exchange-traded funds or “ETFs” are an excellent way to trade a group of stocks in the same industry or sector without buying shares in multiple companies.
ETFs can be traded as easily as stocks. Similar to mutual funds, ETFs can provide diversity to whole markets like the S&P 500, individual sectors like technology or financial stocks, Commodity and currency ETFs are also now available.
Because ETFs have a market and liquidity similar to stocks, ETF trading is an increasingly popular way for swing traders to take advantage of the same patterns and price action found in most common stock trades. They sound perfect but before you begin, be sure you know what ETFs are all about: what they are made of and how they work.
ETF Swing Trading Advantages over Mutual Funds
Investing in a sector rather than an individual stock
Mutual funds were not designed for trading, they were designed for long term investing within a particular type of security or industry. In today’s rapidly changing world, swing traders created a demand for the same diversity but needed a vehicle that offered liquidity to be active in the most recent market moves.
If a technology, oil, gold or financial sector had obvious order flow investing in a mutual fund would not do the trick and buying several stocks at the time may not be practical.
Based on your analysis, you may have an analysis of the future of a specific industry, but you may have concerns about choosing the single stock to buy. If you’re interested in a sector but don’t want to commit your entire investment to one company, an ETF purchase can help spread your risk within that sector.
Minimizing Risk with an Exchange Traded Fund
Many stocks have large gaps over night.
If there is significant news, you are subject to massive exposure without the ability to trade out of the position. The components of an ETF smooth out the volatility that one stock may possess and limit your risk to gap type movements. More often than not an ETF will not have the same volatility as the individual stock.
When doing your research for new swing trading ideas often you will find groups of stocks that have an obvious trend, then you need to chose which stocks to trade. Allocating money to an ETF could be a terrific way for you to swing trade the sector without needing to get the right individual stock at the right time.