How to Diversify and Reduce Risk with An Exchange Traded Fund

An Exchange Traded Fund or an ETF is sort of a cross between a stock and a mutual fund. Like a mutual fund when an investor purchases an ETF they are purchasing a basket of stocks usually in a specific industry or on an index. These also include commodities such as gold, oil and agriculture.

Difficulty: Moderate

Instructions

Things You'll Need:

• A brokerage account

1. Understand them. ETFs have significant advantages over mutual funds. The biggest of which is there are no management fees. You can buy and sell an ETF just as you would any stock. Also 70% of fund managers underperform the indexes. So from that point of view it would make more sense to just purchase an index ETF such as the SPY which mirrors the S&P 500 or the QQQQ which mirrors the Nasdaq. as you are more likely to make money.

2. Decide on what industry to invest in. There are ETFs in almost any industry these days days from banking and energy to retail and commodities. They generally invest into a basket of stocks related to that industry that way you will not be as adversely affected if a single stock is downgraded or has a bad earnings report.

3. Use seasonal strategies. One advantage of using ETFs is that it makes it easier to use seasonl strategies that occur year after year in certain industries. For example retail and gold stocks generally start to rise in September and October when anticipation of the Christmas season starts.

4. Trade options on these ETFs If you'd like to get a bit of leverage on this you can also trade options. This will give you more flexibility as it will allow you to use different strategies such as spreads or writing covered calls.

Resources

• OptionSpreadTrades.com