Because of its numerous advantages, such as low-cost ratios, high liquidity, a wide variety of investment options, flexibility, and a low investment limit, exchange-traded funds (ETF) are excellent for new investors. ETFs are also ideal vehicles for a variety of trading and investing methods employed by inexperienced traders and investors because of these characteristics. In no particular order, these are some of the greatest ETF trading techniques for beginners.
The most fundamental technique is dollar-cost averaging. The practice of buying a specific fixed-dollar quantity of an asset on a regular basis, regardless of the item’s fluctuating cost, is known as dollar-cost averaging. Beginner investors are generally young individuals who have worked for a year or two and have a steady salary from which they may save a little amount of money each month.
For newbies, there are two key benefits to investing regularly. The first is that it makes the savings process more disciplined. It makes a lot of sense to pay yourself first, as many financial advisors advise, which you can do by saving regularly.
The second benefit is that by investing the same set amount in an ETF every month—the basic principle of dollar-cost averaging—you will collect more units when the ETF price is low and fewer units when the ETF price is high, average out your holdings’ costs. If one adheres to the discipline, this technique can pay off beautifully over time.
For example, suppose you put $500 in the SPDR S&P 500 ETF (SPY), an ETF that tracks the S&P 500 Index, on the first of every month from September 2012 to August 2015. Thus, in September 2012, when the SPY units were trading at $136.16, $500 would have gotten you 3.67 units, but three years later, when the units were trading at $200, $500 would have gotten you 2.53 units.
Based on closing prices adjusted for dividends and splits, you would have acquired a total of 103.79 SPY units throughout the three-year period. These units would have been worth $21,735 at the closing price of $209.42 on Aug. 14, 2015, for an average yearly return of over 13%.
Asset allocation, or assigning a percentage of a portfolio to other asset categories for diversification purposes (such as stocks, bonds, commodities, and cash), is a strong investment strategy. Because most ETFs have a low investment barrier, a novice can easily execute a basic asset allocation plan based on their investment time horizon and risk tolerance.
Because of their lengthy investing time horizons and high-risk tolerance, young investors may be fully engaged in equities ETFs while they are in their 20s. However, once people enter their 30s and make big life changes like having a family and purchasing a home, they may switch to a less ambitious investing mix, such as 60% stocks ETFs and 40% bond ETFs.
Swing trades aim to profit from large fluctuations in stocks or other financial assets such as currencies or commodities. Unlike day trades, which are rarely left open overnight, they can take anything from a few days to a few weeks to sort out.
Diversification and narrow bid/ask spreads are two characteristics of ETFs that make them suited for swing trading. Furthermore, because ETFs are accessible for a variety of investment classes and sectors, a novice might select to trade an ETF based on a sector or asset class in which they have special experience or experience.
Trading a technology ETF like the Invesco QQQ ETF (QQQ), which tracks the Nasdaq-100 Index, for example, may benefit someone with a technological background. A beginner trader who carefully follows commodities markets may opt to trade one of the numerous commodities exchange-traded funds (ETFs), such as the Invesco DB Commodity Index Tracking Fund (DBC).
Because ETFs are generally bundles of stocks or other assets, they may not move as much as a single stock in a bull market. Similarly, their diversity makes them less vulnerable to a large negative fall than single equities. This protects against capital degradation, which is a crucial concern for novices.
Whatever ETF investing plan you choose with, be sure you’re aware of the dangers as well as any fees or commissions you’ll have to pay, because not every ETF strategy is suitable for everyone, especially if you’re a novice investor. That is why you should only choose methods that you’re comfortable with.