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.
Investors may have heard the phrase, “the trend is your friend.” In rising market trends, an investor would ride the upside, but if the trends weaken, it may be time to sell or shift into safety. [Factors To Look For In An ETF Retirement Portfolio]
At ETF Trends, we like to use the 200-day exponential moving average to provide a general guideline for ETF trades. For instance, if an ETF moves above its 200-day trend line, it is a buy signal. However, if the ETF dips below its long-term trend line, it may be time to let go of the position. [An ETF Trend-Following Plan for All Seasons]
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.