ETF Trading Strategies

ETFs (also known as Exchange Traded Funds) are mutual funds that can be traded on a stock exchange just like regular stocks. ETFs are not like mutual funds, which can only be purchased and sold at the close of a trading session. Instead, they can be bought or sold at any time during a trading period, just like stocks.

ETFs combine the diversification benefits and liquidity of mutual funds, making them a popular choice for investors who are just starting out. ETFs offer liquidity and short-term price movements that investors and traders can profit from.

These ETF investing techniques will help you.

SIP

One of the most straightforward ETF investing strategies is to set up a Systematic Investment Plan. A SIP strategy allows you to invest a set amount each month in the ETF of your choosing, regardless of its current price. If you do this for a sufficient time, the rupee cost average phenomenon can be a benefit, which could lead to a lower overall investment cost.

The SIP route allows you to buy more units when the ETF's price is low, and less units when it is high. The overall cost of your ETF holdings will be automatically averaged if you follow this strategy for a long time. The power of rupee cost averaging can lead to significantly higher returns.

Swing Trading

This is a popular strategy that short-term traders use to trade ETFs. Swing trading is basically about trying to capture the short-term price movements for an ETF. This ETF strategy trades are usually kept short and last for only a few days or weeks. ETFs are the ideal instrument to execute such a strategy due to their high liquidity and the ability to purchase and sell ETF units at any time.

Here's an example showing how swing trading can be used for ETFs. Let's say that a Nifty 50 ETF trades for Rs. Today, it is 80. If you have a bullish outlook on the market, then you purchase 100 units of the ETF at Rs. 80 units each. The ETF's unit price rises to Rs. after approximately 4 to 5 trading sessions. 90 All 100 units of ETF are sold at Rs. You make a profit of Rs. 90 per unit. 10, which adds up to Rs. 1,000

Sector turn

ETF investing in sector rotation involves selecting the most profitable sectors and making sure they are well-respected. This ETF trading strategy for beginners is simple and straightforward. In light of the current COVID-19 situation pharmaceutical stocks are enjoying a great run on the market.

To use the sector rotation strategy, a trader would need to invest in ETFs that cover the pharma sector. Investors would then book profits and move on to more defensive sectors such as the FMCG sector ETFs, once the pharmaceutical sector is out of favor.

ETFs can also profit from seasonal trends. The tourism and travel industry is very seasonal. A seasonal rotation ETF strategy allows an investor to invest in a specific industry for a limited time. Investors would then cash out of the industry once the season is over and move their capital to other seasonal industries.

Short-selling

Short-selling is another popular ETF trading strategy. Short-selling is when you sell an ETF at a higher price, and then buy it back at a lower price. You would get the difference between the selling and buying prices as your profit. Short-selling, however, is one of the most risky ETF trading strategies and should be avoided.

A great way to get some returns in a market going down is to short an ETF. Here's an example for short-selling. Let's say there is a Nifty Bank ETF trading at Rs. 50 The outlook is negative and you expect the ETF's decline. You short-sell 100 units of Nifty Bank ETF at Rs. 50 per unit today. If the market moves in favor of you, the Nifty Bank ETF's price will drop to Rs. You can buy 100 units of Nifty Bank ETF for Rs. 30 per unit. To close your position, you will need to pay 30 per unit This trade can bring you around Rs. 2,000 (Rs. 20 x 100 units

Hiding

Many investors and traders use ETFs to hedge investment risk. ETFs are great tools for hedging risks because they closely track an industry, a sector, or an index. Let's say you have an open position on the Nifty 50 index. To protect your option position against downside risk, you can use an index ETF such as the Nifty 50 ETF. This hedging strategy requires you to short-sell Nifty 50 ETF. You can prevent your index option position being lost by doing this.

You can also reverse the strategy if you have an investment in Nifty 50 ETF to protect it from downside risk. You can either short-sell Nifty 50 futures contracts or buy put options for the Nifty 50 index. This will prevent your Nifty 50 ETF investment from becoming a loss.

Conclusion

Exchange Traded Funds (ETFs) are one of the most versatile investment options available, and they can be used by both novice and seasoned investors. These strategies will help you if you are interested in investing in ETFs.