As with any investments, it is important to understand the product you are using in your portfolio. So before you decide to include ETFs in your investment strategy, you should understand the basics about Exchange Traded Funds or ETFs. I always say, "Know your tools!"
Know the Basic Definition of an ETF
ETF stands for Exchange Traded Fund. It is a fund that tracks an index, but can be traded like a stock. ETFs always bundle together the securities that are in an index; they never track actively managed mutual fund portfolios (because most actively managed funds only disclose their holdings a few times a year, so the ETF would not know when to adjust its holdings most of the time). Investors can do just about anything with an ETF that they can do with a normal stock, such as short selling. Because ETFs are traded on stock exchanges, they can be bought and sold at any time during the day (unlike most mutual funds). Their price will fluctuate from moment to moment, just like any other stock's price, and an investor will need a broker in order to purchase them, which means that he/she will have to pay a commission. On the plus side, ETFs are more tax-efficient than normal mutual funds, and since they track indexes they have very low operating and transaction costs associated with them. There are no sales loads or investment minimums required to purchase an ETF. The first ETF created was the Standard and Poor's Deposit Receipt (SPDR, pronounced "Spider") in 1993. SPDRs gave investors an easy way to track the S&P 500 without buying an index fund, and they soon become quite popular.
Know the Benefits and Risks of ETFs
Once you have an understanding about ETFs, you can learn how they work to your advantage. Understanding the benefits of ETFs will help you utilize the correct investment strategy when including exchange traded funds in your portfolio.
It is equally important to understand the disadvantages of ETFs. Before you buy or sell any investment product you need to know all the limitations of the asset. You don't want to have any misconceptions about an investment's performance and you need to understand all the risks involved. Here are some good articles to help you understand the pros and cons of ETFs.
Learn About the Different Types of ETFs
There is no shortage of ETFs. There are multiple Exchange Traded Funds for indexes, sectors, styles, and regions. It can be a little overwhelming, but if you have a better understanding of the major types of ETFs, it will help you narrow down which kind of funds will fit your investing strategy. Here are some of the major ETFs we here at Fusion Trading use:
ETFs
1. S&P500 SPDR's - SPY
2. PowerShares QQQ - QQQQ
3. ProShares Ultra Dow30 - DDM
4. ProShares Ultra Oil&Gas - DIG
5. PowerShares Gold Double Long - DGP
6. Direxion Large Cap Bull 3x Shares - BGU
7. Direxion Energy Bull 3x Shares - ERX
8. Direxion Technology Bull 3x Shares - TYH
Inverse ETFs
1. Short S&P500 ProShares - SH
2. ProShares Short QQQ - PSQ
3. ProShares UltraShort Dow30 - DXD
4. ProShares UltraShort Oil&Gas - DUG
5. PowerShares Gold Double Short - DZZ
6. Direxion Large Cap Bear 3x Shares - BGZ
7. Direxion Energy Bear 3x Shares - ERY
8. Direxion Technology Bear 3x Shares - TYP
Small list, big profit potential!
Decide On the Best ETF Investing Strategy
Are you investing in ETFs to gain exposure to a market sector? Are you using ETFs as a hedge against foreign risk? Do you want to trade ETF derivatives against your positions? Are you using fundamental analysis or technical analysis? Are you going to use a day, swing or position trading strategy? Are you going to use a trend or range trading strategy? Are you going to take advantage of Inverse ETFs? Before you adding ETFs to your portfolio, you need to decide why you are investing in the funds. Only then can you decide which ETF trading strategy is the best fit for your portfolio.
We here at Fusion Trading International use and strongly recommend Technical Trading. We primarily use a trend trading strategy mixed with a secondary counter-trend trading strategy. We use these strategies for day, swing and position trading. You must take advantage of all three if you want to increase your chances of success! You will learn all of these strategies and more...don't waste another minute without taking advantage of this amazing training program!
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