ETFs: Complete Guide to Day Trade Them!

There are many financial assets you can trade in the market. Among the most important assets are stocks, commodities, bonds, and Exchange Traded Funds (ETFs).

In this report, we will have an in-depth look at ETFs, what they are, and how you can trade them successfully.

What is an ETF?

An ETF is a financial asset that is created by several large investment companies to offer diversification across assets. The fund is eerily like a mutual fund.

The only difference is that a mutual fund can only be bought and sold after the market closes. An ETF, on the other hand, can be traded in the same way a stock is traded.

Some of the biggest creators of ETFs are Blackrock, Vanguard, and Invesco.

Types and examples of ETFs

There are many types of ETFs. Among the most common are:

  • stock
  • commodity
  • bond
  • International
  • sector

A commodity ETF is one that allows you to a single or diversified group of commodities.

A bond ETF, on the other hand, is an ETF that invests in corporate, municipal, and sovereign bonds.

International ETFs invest in foreign companies and bonds. Among these, there are those ETFs that invest in emerging markets, Europe, Asia, and Latin America.

Stocks ETFs are the most popular. These funds invest in different types of companies and offer them to traders.

A good example is SPDR S&P 500 ETF, which tracks all companies listed in the S&P 500. Another example is Invesco QQQ, which also tracks companies in the S&P 500.

Sector ETFs are those that focus on individual sectors of the stock market. Some of these sectors are technology, consumer discretionary, and consumer staples, among others.

Examples of these are Fidelity® MSCI Information Tech ETF, Vanguard Information Technology ETF, and Vanguard Consumer Discretionary ETF, among others.

How ETFs work

The idea behind is relatively simple. First, an ETF provider needs to come up with a fund and go through the regulatory process.

Most recently, an ETF provider known as VanEck was denied permission of launching a Bitcoin one.

Second, the company creates an ETF by buying the assets. So, if it is a stock ETF, the company will by all the constituent stocks.

Similarly, if it is a gold ETF, the company behind it will buy physical gold.

Finally, the ETF is listed in a major exchange and you can trade them as you trade shares. Many brokerage companies like Robinhood, Charles Schwab, and Fidelity offers these ETFs.

How to day trade ETFs

In most cases, ETFs are usually preferred for passive investors. These are people who want to invest their money for a long time.

These people prefer ETFs because of their diversified nature, which enable them to minimize risks.

Still, it is possible to day trade ETFs because they are offered by brokers and that they look like stocks. Therefore, you can read our online trading course if you are just getting started.

Basically, there are three steps for trading ETFs.

#1 – Check the Platform

First, you need to ensure that your broker offers ETFs in their platforms. This is an important part because not all brokers offer the ETFs.

#2 – Identify what you want to Trade

Second, you need to identify the ETFs you want to trade. You can do this by identifying and learning more about them. Fortunately, most brokers and online platforms provide more details of ETFs.

For example, Seeking Alpha offers an excellent platform for ETF analysis. For istance, this page on iShares Core S&P MidCap ETF provides details like the companies that make up the ETF and their weightings.

#3 – Conduct a Technical Analysis

Third, you need to conduct a technical analysis just as you do in stocks, currencies, and commodities.

For example, the daily chart below shows Invesco QQQ with moving averages and MACD.

Some of the strategies you can use to day trade ETFs are scalping, algorithmic trading, price action, swing trading, and arbitrage among others.

Technical Analysis: Key Indicators 

Advantages of trading ETFs

There are three main benefits of trading ETFs.

  • They are like stocks, which means that you can trade them as you trade individual stocks.

  • ETFs are transparent, which means that you can find all the information about them from the provider. As mentioned above, you can find their information in other brokerages.

  • Diversified. ETFs are highly diversified, which is a good thing if you are investing in them.

Disadvantages of ETFs

There are four main cons of trading ETFs:

  • Since ETFs are diversified, conducting a fundamental analysis about them is usually time consuming. For example, if you are conducting a fundamental analysis on iShares Core S&P MidCap ETF, you need to know more about the constituent companies.

  • ETFs are recommended for long-term investors – Compared with individual stocks, ETFs are usually recommended for people looking at holding them for years.

  • Less volatile – ETFs are usually less volatile than individual stocks. This is a good thing for long term investors but a bad thing for traders. As we have written before, traders do well in periods of high volatility.

  • Not provided by most brokers – Another disadvantage of ETFs is that they are not provided by most brokers.

Example of technical analysis in ETFs

Here is a good example of technical analysis in ETFs. In the chart below, you can see that the Vanguard Midcap ETF.

On it, you can see the abandoned baby, which is a reversal candlestick pattern. You can also see that we have applied an impulse Elliot Wave pattern and double exponential moving average pattern.

Final thoughts

ETFs are great financial assets that are mostly used as investment vehicles. In fact, very few people day trade them and we recommend that you stick to individual assets like stocks.

Still, if you are interested in ETFs, we recommend that you take time to learn more about them and craft a good trading strategy.

External Useful Resources

  • Rules to Follow if you Day Trade ETFs – Dummies
  • How to Day Trade Volatility Exchange Traded Funds – Investopedia

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