In this piece, we will take a look at the 5 best ETF trading strategies for beginners. If you want to go through our introduction to ETFs and the stock market in general, then take a look at the 10 Best ETF Trading Strategies for Beginners.
5. Hedging
Insider Monkey Score: 7
A hedging strategy entails the purchase or sale of an investment security to mitigate the potential decline in the value of another asset or security. For instance, an investor with a substantial long-term position in stocks might engage in short selling of a stock ETF or acquire inverse ETFs. This approach aims to generate a positive return if the value of the long stock positions decreases. In some cases, beginners may find it necessary to hedge against downside risk in a sizable portfolio, especially one acquired through inheritance.
Alternative forms of a hedging strategy may involve acquiring specific investments to offset the risks associated with a particular economic scenario. For example, an investor might opt to include ETFs designed for inflation, such as a commodity ETF, which have historically demonstrated better performance compared to the broader market during periods of high and increasing inflation.
4. Swing Trading
Insider Monkey Score: 7
Swing trading is a strategy where an investor seeks to capitalize on recent price momentum and anticipated short-term gains in stocks or ETFs. Unlike day trades, which are typically closed within a day, swing trades have a holding period that extends beyond a day, often lasting up to a few months.
ETFs possess attributes that render them suitable for swing trading, including diversification and tight bid/ask spreads. Moreover, the availability of ETFs across various investment classes and sectors provides beginners with the flexibility to trade in areas where they have specific expertise or knowledge. This allows them to choose ETFs based on a particular sector or asset class, enhancing their ability to execute successful swing trades.
3. Dividend Investing
Insider Monkey Score: 7
Several investors opt for dividend ETFs to implement an income strategy or to hold a diversified selection of quality stocks for long-term appreciation. Instead of conducting individual research to identify dividend-paying stocks, beginner investors can conveniently purchase a dividend ETF aligned with a specific strategy, whether it be focused on dividend appreciation or high yield.
Similar to individual dividend stocks, ETFs usually distribute dividends on a quarterly or annual basis. Investors have the option to receive these dividends as income, or they can opt for an automatic reinvestment approach, allowing the dividends to be used to acquire additional shares of the dividend ETF.
2. Asset Allocation
Insider Monkey Score: 9
Asset allocation, the practice of distributing a portion of a portfolio across various asset categories such as stocks, bonds, commodities, and cash to achieve diversification, stands as a potent investment strategy. The accessible investment threshold of most ETFs simplifies the process for beginners to establish a fundamental asset allocation strategy tailored to their investment time horizon and risk tolerance.
Numerous ETFs are inherently designed to provide diversification. For instance, an ETF that mirrors a broad market index, like the S&P500, typically comprises a portfolio of stocks representing a varied array of companies across different sectors. Nevertheless, it’s crucial to recognize that not all ETFs possess inherent diversification. Some ETFs, such as the iShares US Technology ETF (NYSE:IYW), which focuses specifically on the technology sector, may exhibit less diversification compared to broader alternatives.
1. Dollar-Cost Averaging
Insider Monkey Score: 9
Dollar-cost Averaging (DCA) involves consistently purchasing a fixed-dollar amount of an asset at regular intervals, irrespective of its changing market price. Typically, novice investors, often individuals in the early years of their careers with a steady income and the ability to save monthly, are encouraged to adopt this approach. Instead of depositing funds into a low-interest savings account, these investors can allocate a few hundred dollars each month towards investing in an ETF or a diversified portfolio of ETFs.
Implementing a DCA strategy can mitigate market risk because the scheduled purchases acquire shares at varying entry prices, potentially reducing the average cost, particularly in a bear market where prices are declining. Automating this approach is convenient through certain brokerage platforms that offer select ETFs at zero commission, thereby minimizing the overall investment cost, especially when making regular interval purchases.
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