How To Maximize Your Stock Portfolio With ETF Trading

Many people enjoy trading ETFs as they present a simple and diversified method of trading an index or commodity. Although investors may have a preference for certain ETFs, most investors do not have a system in force for ETF trading. In this article we will look at what an ETF specifically is, the benefits of ETFs, and a way to trade ETFs that can be lucrative and safe at the same time.

To start with the basics, ETF stands for Exchange Traded Fund. As the name suggests, it is a fund that is traded, like a stock, on a stock exchange. The fund tracks an index, a commodity, or a basket of assets. For example, there are funds that track multiple exchanges (such as SPY, which tracks the S&P 500 and is comprised of more than 500 stocks selected across 24 industry groups); there are funds that track a commodity (such as SLV, which roughly tracks the price of silver); And there are funds that track other assets like bonds, real estate (REIT), currencies, etc. ETFs cover everything from broad-based indices to international and country-specific indices to industry-specific indices.

The benefits to trading ETFs are numerous. They include:

  • Diversification over a series of assets and relative stability of an index fund.
  • Possibility to buy as much or as little as you want, just as you would with a share.
  • Possibility of buying in the long or short term, and with hedging strategies, as can be done with a share.
  • ETF expense ratios are typically lower than most mutual funds due to lower marketing and distribution expenses and the fact that ETFs are generally not actively managed.
  • Ease of investing in raw materials that would otherwise be difficult to acquire (oil, for example, very difficult to physically own; or silver as another example – a $ 50,000 purchase of the physical metal is extremely difficult to take home!)
  • Transparency in both portfolio and price that is constantly updated throughout the day.

With this background, let’s look at a possible strategy to maximize an investment portfolio by adding ETFs.

Always consider risk management first. We suggest that you invest approximately 10% of your overall portfolio in ETFs, with each ETF representing only 1% of your total portfolio.

Next, focus on the concept of “warm hands.” Basically, you are buying the best performing funds from the recent past and keeping them for the next period. We suggest using a period of one month. ETFs that perform well one month can be expected to continue to perform well the next. Get started by buying the top 10 performing funds for the last month. Of course, not everyone will do well, and each month you will remove the ones that fall from the top 10 list and add the new ones that make it to the list. By following this technique, you will always have the best performing ETFs in your portfolio! All you need is a list of the best performing ETFs and just select the top 10 – the work is done for you!

A final thought to maximize profits on your ETF portfolio is to take advantage of seasonality trends. Not all stocks (and therefore ETFs) perform the same in the bear and bull seasons. Although the summer is considered “bearish”, Dow Utility shares tend to act bullish during this time. In early April, you may want to start looking for “IDU” (an iShares ETF that mimics Dow earnings). The IDU is generally bearish from May to September.

When playing with an ETF like IDU, you are trading the entire index, not an individual stock, and this is important. When we look at deep patterns of seasonal undercurrents, the effects of these are more visible across the market itself than on any single stock.

As winter approaches, injecting drug users tend to turn bearish, and our focus is better on the Dow Industrials, which are typically bullish from October to April. Again, we want to look at trading the entire index here, and a great way to do that is through the iShares “DIA” ETF, which mimics the Dow Industrials.

In short, ETFs are a great way to play a sector of the market and they have many advantages over both regular stocks and mutual funds. By using some of the strategies we have discussed here, you now have an advantage over other traders, benefiting both your portfolio and your pocketbook!

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