The Flexibility of ETFs

The idea behind trading fund based securities is that they offer investors and traders the ability to trade a lot of different things. While one may invest in individual assets on their own, and even put together a basket of similar assets like funds do, funds simply allow one to gain whatever exposure they desire with a lot more efficiency, trading a single asset rather than many.

This is a huge advantage in terms of both management effort and trading costs, and much lower trading costs is one of the biggest things that sets funds apart from investing in individual components. If you have to pay a commission for each asset in your basket, as well as place orders for each individually, it’s just so much easier and cheaper to do it all with a single trade and a single commission.

ETFs really stand out in the diversity of investments they offer. Given the advantages of ETFs, not only being funds but being traded like securities, ETFs can be offered for virtually anything that investors have an interest in purchasing.

Should you wish for the broad exposure of a major U.S. index such as the S&P, the Nasdaq, or the Dow, you can easily buy and sell ETFs that mirror these indexes. Should one wish to gain access to stock markets in other countries, many country specific stock ETFs are offered as well.

The Flexibility of ETFsETFs also permit investors to concentrate on certain sectors if they wish, or certain types of stocks that are similar, such as ones in emerging markets. People can also trade baskets of stocks based upon a number of other categories, such as market capitalization.

Investors can also invest in ETFs based upon a number of different commodities, including ones that invest in precious metals such as gold and silver, which offer the great advantage of much tighter spreads versus buying the metals on your own.

Should one wish to become exposed to derivatives but not want to trade them individually, ETFs that trade in futures, forwards, and options can be purchased, which allows investors to better manage their risk and also allow their derivative investments to be professionally managed, avoiding a lot of mistakes that individual traders tend to make.

One can also get access to the bond market with ETFs, and bonds are difficult to access for most individual investors otherwise. One can trade ETFs based upon cash or invest in ones that use leverage, increasing both the potential return and risk, if one chooses. There are also ETFs that are set up to profit if the value of the assets it is exposed to goes down, similar to shorting but without having to borrow the securities. Shorting ETFs is also an option that is available.

ETFs Enjoy Flexibility of Strategies as Well

Through ETFs, virtually any type of asset that one wishes to take a position in is available at your fingertips, in a way that allows for great flexibility as far as one’s investment or trading strategy is concerned.

Should one wish to invest long term in an ETF, one simply holds their position in it for whatever length of time that is desired, all the while allowing for positions to be closed with the click of a mouse.

If the intention and the strategy is aimed at shorter term trading, one may execute such a plan as one wishes with ETFs, and there are many that trade ETFs on a very short term basis, holding positions for as little as a few minutes.

This is the case with stocks as well, although normally you would have to trade stocks individually, where ETFs allow you to do this with baskets of stocks. Mutual funds offer baskets of stocks but they can’t be traded in real time like ETFs can, and aren’t really suited to shorter term trading, due to the slippage involved. When you have to wait until the next day to close your position, this lag makes mutual funds really only suitable for longer term investing.

ETFs Do Not Limit You to the Long Side

In this sense, ETFs represent the best of both worlds, with all of the benefits of a fund, and all of the flexibility of trading an individual stock. This includes the ability to take both long and short positions in a fund, something that mutual funds do not offer at all.

The biggest impediment, by far, with mutual funds is that they limit investors to the long side only, where the only option is taking positions that benefit you when the price of the asset rises, and hurt you when prices decline.

The value of assets both move up and down at various times, and these trends can be of a significant length, even running for as long as several decades. If the assets you are interested in are in a downtrend, and especially if the downtrend is an extended one, and you are limited by only taking long positions, this means that you cannot profit and will instead most likely see the value of your investments decline during these periods.

Although some assets like stocks do tend to exhibit very long upward trends, they are certainly not immune from downtrends of various lengths, with some being very significant in magnitude as well.

Some assets may not even enjoy very long term growth, like commodities or bonds, and it’s even more important to have the flexibility of not being just limited to taking long positions in these assets. In all cases though, trends to vary according to a number of different conditions, with the primary one being one of supply and demand, and it’s quite important to be able to take advantage of both uptrends and downtrends, and not just uptrends.

Who Does This All Matter To?

A lot of individual investors prefer what we could call a plain vanilla approach to investing, where they seek the utmost of simplicity in just investing in the stock market long term and staying long and fully invested. They don’t wish to try to time their positions or make any decisions at all about their investments other than how much to invest.

ETFs allow for this strategy to be implemented very simply, as one can just invest in something like a major U.S. stock index, or whatever else the investor may choose to put their money in, and the position is then just held as long as desired.

If an investor is looking to invest small amounts regularly though, mutual funds do offer the advantage of not having to pay a commission each time, with no load mutual funds anyway, as opposed to placing monthly trades for instance for small amounts invested in a fund.

This can be enough of an issue to make mutual funds much more desirable than ETFs for this style of investing, and mutual funds indeed do have their place with many investors. With ETFs, one would need to save up these amounts and make larger purchases, although in a favorable market this may reduce one’s performance, by having funds sitting in cash waiting to accumulate enough to invest versus being invested in a fund all the while.

This is the only major concern with ETFs, although this does make ETFs more suitable for short and medium term investing than long term. One is not limited by just going with either a mutual fund or an ETF, as one can for instance take a significant position in an ETF where commission costs are negligible, and use a mutual fund for smaller, scheduled contributions.

With those who are looking to time their investments, regardless of the time frame one seeks to do this in, will enjoy significant benefits with ETFs over mutual funds, as ETFs are much more suited to trading.

This is especially the case if one seeks to play both sides of a market, looking to trade with trends and capitalize on them regardless of their direction. This is the most efficient form of investing as it actually involves choosing and managing your positions based upon market behavior.

This is supposed to be the goal with any investing, although with long term short positions, the trend that is sought to be taken advantage of is the very long uptrend only, where other strategies involve taking advantage of other trends of shorter duration as they manifest.

Those who wish to be more adventurous with their investments, not only looking to time the stock market and defer some of the risk by diversifying with bonds, but also seek out investing in other types of assets, will be well served by the structure and opportunities of ETFs.

With a wider variety of assets and funds to trade, ETF investors and traders are able to view and assess the desirability of investing in a number of other types of funds. While the typical behavior of an asset over the long term, such as stocks, does matter somewhat, how the asset is performing now and where it is headed matters much more.

With a greater selection of things to take positions in, along with a means of entering and exiting them at will, this can serve to expand the number of opportunities for investors and traders alike, particularly those who are prepared and willing to take advantage of particular trends in particular assets, whether the movement is either up or down.

When we combine this with the flexibility of being able to use any number of investment and trading strategies across any time frame one chooses, this does make ETFs a very desirable way to trade in securities among those who seek this enhanced flexibility.

Ken Stephens

Chief Editor,

Ken has a way of making even the most complex of ideas in finance simple enough to understand by all and looks to take every topic to a higher level.

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