In conversations about exchange traded funds (ETFs), the talk mostly tends to focus on how to choose the right one for you, how to evaluate a field of hundreds and the best strategy to employ. You, as an investor, may be getting lost in the conversation. Examining your own style can help you make more ideal choices tailored to your unique goals.
There are three major categories of investor. By determining the category you fall into, you’ll gain a better understanding of which funds will round out your portfolio, says Don Dion for The Street.
- The Professional Trader: You use ETFs daily in order to accomplish a variety of objectives, including managing exposure, hedging current positions and lending support to positions already owned. You aren’t afraid of some leveraged funds or commodity ETFs containing swaps and futures. Of primary importance to you is liquidity because you want to enter and exit positions quickly.
- The Hands-Off Trader: You don’t want to deal with the markets every day. Instead, you prefer to just put together a small, tax-efficient portfolio made up of core holdings to keep them on target. You may supplement the core holdings with some niche or sector funds to round it out. You don’t plan to be in and out of positions frequently, so you’re on the lookout for funds that can provide alpha over the long-term. [How Indexing Strategies Can Help You.]
- The Active Trader: You use ETFs to gain entree into popular market areas. You may only hold a position for a short period of time to capitalize on a trend, and your most preferred way to use ETFs is to supplement positions you already own. Like the pro trader above, you prize liquidity, so you want funds with heavy trading volume and lots of assets. [How to avoid ETF liquidity issues.]
In which category do you see yourself?
Whatever kind of trader you happen to be, one thing remains true across all types: you need a strategy. A simple one we suggest is trend following, which uses the 200-day moving average to find buy and sell signals. [How to Follow Trends.]
For more stories about ETFs, visit our ETF 101 category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.