6 Best ETF Trading Strategies For Beginners

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The ETF market has grown exponentially during the last decade, touching 10 trillion USD in value in 2022. ETFs have emerged as a favorable option for beginner traders due to their low investment threshold and diversification options. 

More and more traders — novice and experienced alike — are investing in ETFs, leading to the magnificent growth of the market.

While traders can always begin their ETF trading journey with little preamble, there are a few strategies that can help you make the most of your trading resources and avoid the pitfalls of the market often faced by a beginner.

Let's take a look at top ETF strategies for beginners.

Overview & types of ETFs

An exchange-traded fund (ETF) is a security that is actually a basket of other securities. It tracks a broad range of securities in one single basket and is traded as an exchange.

Best ETF Trading Strategies for Beginners

It is a pooled investment vehicle like mutual funds and is traded like a stock. Having a bunch of varied securities bundled up allows ETFs to have low risk and high diversification at once. 

Even if one security goes down in value, the others can mitigate that loss. This unique set of features has made ETFs a popular choice among beginners. 

The first ETF came to life in 1990 in Canada. 

The number of ETFs worldwide has grown from 276 in 2003 to 8,754 in 2022

Some common ETFs are:

  • Equity ETFs: company stocks and shares
  • Bond ETFs: government bonds, corporate bonds, and other fixed-income instruments
  • Index ETF: entire stock market index
  • Sector ETFs: grouping of ETFs centered on specific industries
  • Commodity ETFs: tracks commodities markets
  • Currency ETFs: track a single currency or a basket of currencies.
  • Inverse ETF: tracks the decline in the value of an underlying benchmark or index.

Let’s take a look at the best ETF strategies that will help beginners make their mark in the market:

1. Dollar-cost averaging 

Dollar-cost averaging is the most basic and popular ETF strategy that traders often begin with. It's the technique of buying a fixed amount of an ETF on a regular schedule. For example, buying $100 of an ETF on the 15th of every month. 

The technique requires you to buy a fixed amount regardless of the changes in the price of the ETF.

In time, you'll be able to average out the cost of your investments and earn gains. You will be able to buy more units when the price is low and fewer units when the price is higher. 

The goal is to keep a constant investment level at all times so that it results in constant results. This is possible because of the dollar-cost averaging phenomenon. It minimizes the impact of the volatility of the market to guarantee steady returns to the users. 

To be able to perform the dollar-cost averaging strategy, you need to have a comprehensive trading platform for your perusal. Make use of its trending ETF database to be up to date about the prices and trends of ETFs of your choice. 

Here are a few things to keep in mind as you put the dollar-cost averaging method to use:

  • Choose a platform that supports the strategy and provides additional features as well. 
  • Make sure to invest the same amount at regular intervals. Do not miss a beat. 
  • Don't be discouraged by the change in price or the volatility of the market and miss an investment. This method is meant to protect you from the change in the market but that can only happen if you invest consistently. 
  • Pick a smaller amount if you're skeptical. Once you gain confidence, you can build your portfolio with bigger investments made through the same strategy. 

2. Short selling

Short selling is considered a risky endeavor with most securities. But not when dealing with ETFs. Also called shorting, short selling refers to the process of buying an asset and paying/agreeing to pay for it at a later date.

2. Short selling

If the price for the security reduces by the promised date, the trader only needs to pay the reduced price and gets to pocket the difference as a profit. However, if the price increases by that date the trader will need to pay the increased price and beer a loss.

While this is a fairly risky proposition with other commodities and securities as they can always suffer a price hike or fall, an ETF is a bundle of a variety of assets that more or less balance each other's value. 

If any asset falls in value, the other assets will help mitigate that loss and stabilize the bundle. It's a far less risky strategy for an ETF and can help you earn comparatively bigger gains by bypassing the risks of price hikes and falls. 

Here are a few tips to ace shorting:

  • Make the most of the broad investment theme by choosing assets from different markets and industries. 
  • If you pick a risky asset, make sure to pair it up with multiple low-risk assets to stabilize your basket. 
  • Stay away from inverse ETFs that are often double-layered or even triple-layered. They are a very risky endeavor as they seek twice and thrice the inverse of a one-day price change in the market. 
  • Don't hesitate to experiment with your bundle as you become more experienced and confident in your trading. It will help you achieve bigger gains.

3. Asset allocation 

Asset allocation refers to dividing your portfolio based on different asset categories such as stocks, bonds, etc. This diversification strategy can be easily implemented on an ETF because of its low investment threshold.

How you split your assets is completely up to you. However, the most common way to do it is the 60/40 split. This allocates 60% of your assets into equity ETFs and the rest 40% into bond ETFs, creating a balanced bundle and giving you exposure to both markets. 

Such an approach doesn't just help you create a well-rounded portfolio, it also helps you create stabilized earnings as it helps mitigate risks. You will be able to perform well in different economic environments.

Your stocks will perform well in positive conditions and the bonds will provide a hedge in poor conditions.

That said, many young traders often dabble with various combinations when it comes to asset allocation, based on their investment time horizon and risk tolerance. 

4. Swing trading

Swing trading refers to capitalizing on the change in price of a commodity during a comparatively shorter period of time such as days or weeks. ETFs are usually diverse and have a tight bid/ask spread, making them ideal for Swing trading. 

4. Swing trading

As ETFs are such a diverse group of investments that beginner traders can find their niche to indulge in swing trading with. 

Having knowledge of a certain market and its price trends helps you make informed decisions and have better outcomes.

For example, a trader interested in gold, silver, and other metals can predict their price swings more accurately and perform better at swing trading in those markets. If you're just starting your trading journey you may not have a preferred market as of now. For better outcomes, you need to rely on experts' advice, so it would be great to find an elite trader funding platform.

Fret not, you can always get into markets of choice and learn about them through extensive resources on the internet. Try different markets to see which one intrigues you the most and pursue it.

You will be able to get better at swing trading in that market with time.

5. Hedging

Hedging is more of a protection against risk as it is an investment strategy. Initiating short positions in broad market ETFs will protect your portfolio from risks of a decrease in value.

It will provide gains in your short ETF positions offsetting the risks that could have come from the decline in their value. 

Another way to execute a hedge is to buy put options. However, you need to be well-versed in the option trading methods to be able to execute this. The goal of both these options is to help beginner traders protect their portfolios against market pitfalls through ETFs. 

6. Seasonal trends

Every market sees seasonal trends come and go. Traders can capitalize on these trends via ETFs. You will need to have a basic understanding of the market to be able to execute these but it's nothing you cannot learn with ease. 

6. Seasonal trends

For example, U.S. equities tend to underperform from May to October and overperform from November to April. ETF traders often take advantage of this by shorting stock-based ETFs before April and closing their short around October. 

Get to know the market better to informed decisions with your ETFs

ETFs are bundled-up securities that dissipate risk to allow traders — especially beginners — to venture into the market with confidence and make steady gains.

If you’re looking to make the most of your ETF trading as a beginner, begin by gaining a basic knowledge of ETFs and the markets that interest you. Deploy some basic trading strategies such as dollar-cost averaging, short selling, asset allocation, and swing trading.

Hedging is one such strategy that helps you protect your portfolio from risk. Lastly, look out for seasonal trends to capitalize on.

Let us know in the comments your go-to ETF strategies.

About the author 

Peter Keszegh

Most people write this part in the third person but I won't. You're at the right place if you want to start or grow your online business. When I'm not busy scaling up my own or other people' businesses, you'll find me trying out new things and discovering new places. Connect with me on Facebook, just let me know how I can help.

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