It is hard to imagine a world without them now but before ETFs were available if you wanted to trade a move that represented the entire S&P 500 you would have to buy shares of each stock in the index. When they came out in 1993 people were able to trade the broader market in a single ticker, SPY.

This is really important for a couple reasons and if you aren’t leveraging them it is like you are trading three decades ago. The last one is a game changer.

Diversification

The biggest advantage was the diversity behind ETFs. Instead of being vulnerable to the price movement of just one stock you could diversify across an entire index and later an entire sector. Gone were the days where your the bad earning report for Sears crushed your entire portfolio.

Also, if there is movement across a sector you no longer had to try in pick the winner out of the group. You could grab the sector ETF and leverage the broader momentum.

Affordability

To buy one share of every stock in the S&P would run you north of $110k. Grabbing one share of SPY costs less than 1% of that price. This makes trading the broader market accessible to the average trader which allows them to exploit the next advantage.

Hedging

Not only does the affordability of these moves let retail traders get in on what was only available to big money in the past, it lets them use these tools to hedge their portfolio. Grossly oversimplified that means that can take a smaller position contrary to the rest of their portfolio that offset an unexpected downturn or reversal.

Leveraged and Inverse ETFs

As ETFs gained popularity, firms started to creates more ETFs that could help traders access more expensive strategies. Inverse ETFs move opposite of the assets they are based on and allow traders to trade downturns without the additional risk of short trades. Leveraged ETFs are built to do exactly what the name implies and increase the leverage a position offers. If the asset it is based on moves 1x, the leveraged ETF moves 2 or 3x depending on which ETF you move.

All of these are incredibly effective tools for traders and if you aren’t already familiar with them, definitely do some digging and add them to your arsenal.

Keep learning and trade wisely,

John Boyer

Editor

Market Wealth Daily

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