From low expense ratios to various investment choices, many benefits make beginners interested in learning how to trade ETFs.
Success isn’t absolute. Like other trading activities, proper knowledge is essential to maximize the profit potential.
So, how do you buy ETFs? Read on, and we’ll explore some strategies worth considering.
One of the most popular choices for those thinking of how to invest in ETF is dollar-coast averaging (DCA). It allows buying assets at different times and prices. In a nutshell, it’s all about investing a fixed amount at regular intervals. It’s in contrast to a lump sum investment.
DCA is an effective strategy that allows market entry without a large investment. You’ll buy more at lower prices and less when the prices are high.
As a periodic investment strategy, DCA allows paying off yourself first. Any excess could go into your ETF investment. These small amounts can accumulate over time without putting too much strain on your finances.
However, the transaction cost can be high. It’s one of the shortcomings of DCA in ETFs. They can quickly pile up. In turn, they can overshadow the benefits.
As the name implies, asset allocation is about allocating your portfolio to different asset classes. Because of ETF’s low investment threshold, it can be easy to implement asset allocation.
Balancing your funds in different asset categories can help maximize yield. It offers various benefits, such as asset diversification, risk reduction, increasing income stream, and capital appreciation.
For example, you might invest 100% of your money in ETFs when you were young. However, as you mature, your priorities change. Hence, depending on prevailing market conditions, you can reallocate assets and invest in different ETF categories.
Another popular option for those who want to learn how to buy ETF is swing trading. It takes advantage of the short-term movements in ETF prices. They’re short-term, lasting a few days to a few weeks.
ETFs have high liquidity. In addition, you can buy and sell ETFs throughout the day. As such, swing trading is an effective option for ETF trading.
To trade ETFs using swing trading, choose the most liquid assets in the market. Narrow down your choices to at least four. Choose two of the best and two of the worst. Consequently, use a percentage scale for trading.
If you’re looking for the best way how to create an ETF portfolio, sector rotation is another strategy you must learn.
It starts with choosing an ETF sector that demonstrates a promising performance. This can depend on current events. For instance, during the height of the pandemic, pharmaceutical companies were amongst the most popular ETFs.
After investing in a profitable sector, the trader would exit the position. In turn, the trader will choose another favorable sector that shows market potential. This is in contrast to staying with a particular asset for a long time.
Last on the list is a strategy that requires selling an ETF at a higher price. Consequently, you’ll purchase the same ETFs once the price is lower. The difference between the selling and buying price will be your profit.
One of the best times to use short selling is in a downtrend market. It’s when people expect the share prices to decline.
Selling ETFs before the market falls and eventually repurchasing in the future can make a profitable trade. The right timing is crucial for your success. If you’re too late, the losses can be significant.
Nonetheless, short selling is one of the riskiest investment strategies. It may not be suitable for beginners. Instead, it’s best for those with experience in the market and a high-risk tolerance.