The Secret to Understanding ETFs

The development of the ETF (Exchange Traded Fund) marketplace has changed the investment landscape.

Investors and traders now have an investment vehicle with the flexibility to enter or exit like an individual stock, but the with the diversification possibilities of a mutual fund.

Over 100 million American households are invested in the stock market with IRAs, 401(K)s or mutual funds. People have become familiar with stock indexes and sectors that those vehicles were designed to target for growth. As an extension, the ETF revolution has enabled investors to transition and take advantage of some significant benefits.

Exchange Traded Funds can track a familiar stock index like the Dow (DIAmonds), S&P500(SPYders), or Nasdaq (NasdaQQQ), and have the flexibility to trade like a stock for long- or short-term investing. Their performance should track the widely followed market segments, but most importantly without the high management fees of mutual funds.

ETFs can be traded and priced just like a stock, with each share representing a percentage of the index or vehicle. The diversification and less individual stock risk are important attributes – especially in times of extreme market volatility.

For active traders, there is no need to wait until the end of the day as in mutual funds to exit or redeem shares. You can also trade ETFs anytime the marketplace is open from 9:30 to 4 p.m. Eastern Standard Time. The ability to eliminate the end-of-day settlement for investment adjustments is a significant advancement for individuals and levels the playing field for all investors.

In addition, ETFs exist for numerous market sectors and investment niches. Almost any possible financial segment is represented, from biotechnology to zinc. The individual ETF components are designed track that industry, financial instrument, segment, or natural resource. This revolution in Diversification has given all investors access to opportunities like the Chinese stock market to emerging technologies with high volume, liquid instruments.

The stock market is broken down into ten major sectors within the S&P 500. Money flows into and out of these sectors as the investment conditions and fundamentals change. Remember, money isn’t made or lost. It just moves into “hot” sectors for better returns. An ETF gives anyone that same opportunity to identify and invest in the specific areas of growth.

Another major advantage is the ability to trade in any market direction. There will be periods of time that investment classes fall as well as rise in value. Shorting takes advantage of that price movement. Exchange Traded Funds offer the ability to trade in any market direction and time frame based upon your individual investment plan.

ETFs offer many advantages for investors with a world of possibilities. The diversification, flexibility and no management costs make ETF’s a natural part of any investment portfolio. Any financial interest or market segment can be targeted to give better returns for your personal investment plan.

Keep it In the Money,

Alan Knuckman

Alan Knuckman
Editor, In-The-Money

Trading Tip of the Day: Adapt or die

Greg Guenthner
An old Xerox of famed investor Marty Zweig’s Investing Rules made the rounds on Twitter recently:

investing rules

These are all gems, but some stand out more than others during these unusual times we’re living through right now. Now more than ever, it’s important that we adapt to change as we find ourselves stuck at home during the pandemic shutdowns.

Rule No. 9 is also crucial. Don’t let your opinion of the news or economic data bias your trading. Investor sentiment is decidedly bearish right now. Don’t let that stop you from making those bullish bets as the market continues to baffle the herd and streak higher!

— Greg Guenthner

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Alan Knuckman

Alan hails from the home of options trading in Chicago, where he began working as a clerk on the floor of the Chicago Board of Trade (CBOT). Beginning with his days on the floor, Alan’s worked with all aspects of the options markets for the past 25+ years.

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