Exchange Traded Fund (ETF) is getting popular among the investors, total global asset value has exceeded US$3 trillion. ETF has the best DNA of both stocks and investment funds. ETF is an investment fund which can be traded like stocks, having the stability of investment funds (risk diversification over a large portfolio) and flexibility of stocks (buy / sell in stock market) with minimal fund management fee.
There are thousands of ETFs globally over various investment markets, eg:
- Stocks: SPY, STI, QQQ, RSX, XLE…
- Bonds: SHY, TIP, AGG…
- Commodities: USO, GLD, DBA…
- Currencies: FXA, FXB, FXC…
Famous ETFs providers are SPDRs, iShares, PowerShares, ProShares, Vanguard, etc. For stocks ETFs, it could be related to stock indices, sectors or a group of stocks selected by the fund managers, either actively or passively managed. Some ETFs could be operated inversely (shorting, eg, PSQ – ProShares Short QQQ ETF, higher ETF price with falling in Nasdaq 100 stocks) or with leverage (Ultra, eg. SSO – Ultra S&P500 Proshares, 2 times leveraging of S&P500 stock index movement).
An investor must learn how to choose the top 10 global ETFs (low risk high return), aligning with own personality and investment goals. Fund managers could help in what to buy, diversifying the investment over a large portfolio to lower the risks. For those with limited capital, ETF is a low-cost way of investment diversification, 1 ETF is equivalent to a portfolio of many stocks with good businesses. It is also easier to monitor 1 ETF, comparing to monitor the entire index with hundreds of component stocks.
S&P500 stock index is a common fund of choice for ETF because this is an investment in US, No 1 economy in the world, through 500 top US stocks. SPY is a popular ETF by SPDR on S&P500. Let’s learn how to buy low sell high for medium term trading. Currently S&P500 is near to historical high price, long term optimism is moderate high, not suitable for investing. However, for medium term traders, each correction of mid-term optimism (see chart below) below 25%, creates a new trading opportunity to buy low. The reward to risk ratio for mid-term trading is around 2:1 (66% upside vs 34% downside, due to 34% Optimism). Over the past 4 years, SPY ETF has appreciated by 72% due to capital gains in S&P500 stocks. It is relatively safer to trade SPY ETF (through S&P500) compared to trade 1 US stock.
