Exchange traded funds (ETFs) are a great investment tool that offer diversity, low costs and tax-efficiency, in addition to offering a vast array of investing options.

ETFs can be optioned, shorted, hedged, bundled and more.  But for the average investor, the best strategies are the simplest ones, which include filling asset allocation and replacing higher-fee mutual funds.

For the advanced investors, James Early of ETF Center for Motley Fool states that ETFs can be utilized in the following manner:

• Tracking entire sectors, geographic regions, or a way to gain exposure to stocks or entire industries that can’t be bought on a U.S. exchange.

• ETFs that track and make bets on bonds. One could utilize these in an anticipated movement in the yields of 7-to-10 year Treasuries.

• Putting cash in short-duration ETFs instead of money market funds, enabling an investor to get double or possibly triple the return of a money market fund.

• Avoiding wash-sale tax rules, due to the vast plethora of ETFs. The “wash” sale rule prohibits selling a losing position and buying it right back, or from buying one “substantially similar.” However, there are so many ETFs that investors can usually find another security similar in spirit to the one they just unloaded.
  

• Pairs trading by going long on a stock and shorting its sector ETF, or vice versa.

• Using ETFs to have a mix of assets in a cheap and simple manner.

ETFs are excellent investment tools, but one must be mindful of its downfalls as well. Always remember to consult your own financial advisor and utilize ETFs in your portfolio in the manner that best suits your risk appetite and overall goals.

Tags: Bond ETFs, ETF 101, Financial, Sector ETFs, Treasury Bonds