As the markets oscillate, investors can use exchange traded funds to manage risk and move in or out of target market or sector based on a trend following strategy.
ETFs are a type of index fund that trade like stocks, offer greater transparency and are typically cheaper than traditional mutual funds.
Due to the ease at which investors can trade ETFs, some may be tempted to chase returns. However, the core benefit of using ETFs is how the investment vehicle helps manage risk, writes Kirk Spano, founder of Bluemound Asset Management LLC, for MarketWatch.
Instead of buying and selling ETFs based on gut instincts and how you feel the markets will turn tomorrow, investors should utilize a set strategy to provide a guide for when you are in or out of a position.
Most investors want relative return on the upside, or ride a rising market, while keeping absolute return on the downside, or exit before the markets completely bottom out. With ETFs, investors can adjust their portfolio’s allocations based on market changes much faster than mutual funds.