ETF Trading Strategies

ETFs combine the diversification of funds with the tradability of stocks.

What are ETFs?


Definition

• Exchange-Traded Funds
• Trade like stocks on exchanges
• Track indices, sectors, or themes
• Diversification in one purchase

Types of ETFs

• Index: SPY (S&P 500), QQQ (Nasdaq)
• Sector: XLK (Tech), XLF (Finance)
• Thematic: ARKK (Innovation), TAN (Solar)
• Bond: TLT, BND
• Commodity: GLD (Gold), USO (Oil)
• Leveraged: TQQQ (3x Nasdaq), SQQQ (3x inverse)

Popular ETF Strategies

Index Investing

• Buy and hold SPY or VOO
• Historically 10% annual return
• Lowest cost, lowest effort
• Beat most active managers

Sector Rotation

• Rotate between sector ETFs
• Follow economic cycle
• Overweight strong sectors
• Underweight weak sectors

Pairs Trading

• Long strong sector ETF
• Short weak sector ETF
• Market-neutral approach
• Profit from relative performance

Leveraged ETF Day Trading

• TQQQ, SQQQ for Nasdaq exposure
• 3x daily moves
• Day trading only (daily reset)
• Never hold overnight

Analyzing ETFs

Key Metrics

• Expense Ratio: Annual fee
• AUM: Assets under management
• Volume: Liquidity indicator
• Tracking Error: How closely follows index

Selection Criteria

• Low expense ratio (under 0.20%)
• High trading volume
• Large AUM (stability)
• Low tracking error

Risk Considerations

1. Leveraged ETFs decay over time
2. Thematic ETFs can be concentrated
3. International ETFs have currency risk
4. Commodity ETFs have contango risk
5. Always check what is inside the ETF