ETF Investment Strategies

ETF strategies range from the very simple, such as diversifying an existing portfolio, to sophisticated hedging. Some examples:

  • Buy-and-hold strategy. ETFs allow participation in long-term general market developments or trends in a specific sector. ETFs can be held as long as the investor chooses.
  • Short term trading. Because ETFs are so tradable and follow the reference index so closely, they are a good short-term investment.
  • Alternative to basket trading. Buying ETFs is easier and cheaper than buying all the shares that together make up the corresponding index.
  • Strategies involving options and futures on the same reference index. ETFs can be used to hedge and optimize positions in derivatives on the same index.
  • Core/satellite asset allocation. ETFs are useful in a core/satellite asset allocation strategy. The core can consist of ETFs on broad indices and the satellites can be made up of ETFs on sector indices that cover specific fields such as telecommunications, technology, pharmaceuticals and banking.
  • Cash equalization. ETFs can be used to convert cash into equities temporarily, until a final decision is made on which companies to invest in.
  • Arbitrage with derivatives or constituent shares. An investor can trade ETFs to profit from any differences between their price and the price of the shares included in the reference index or derivatives based on that index.