How do investors use exchange traded funds (ETFs)?
Many investors utilize ETFs as a cost-efficient means to create long-term, well-diversified portfolios. But some investors use them for other investment tactics.
“How Investors are Using ETFs” makes a couple of good points in respect of ETF strategies.
Because ETFs are typically very liquid, a:
growing number of investors that have increasingly used ETFs as a tool to speculate on a market segment. Investors enjoy the ability to jump in and out of the stock market with a quick trade.
There is a temptation to use ETFs to engage in market timing tactics. You should be aware of this and avoid it as much as possible.
I have no problem with using ETFs to take specific positions or take advantage of longer term trends. For example, with North American interest rates so low, I would not likely recommend currently investing in very long term bonds. Rather, short term durations are preferable (for many reasons). However, if I am building a long-term core portfolio, I would want some longer exposure to go with medium and shorter term durations.
But I do not recommend jumping in and out of ETFs to try and time short-term volatility. This goes back to the active versus passive management argument. Active managers often try to time market movements. Usually with little to no success. If the professionals cannot prosper through market timing, it will be even more difficult for amateur investors. So be careful.
Day Trading Speculation
Even more care should be taken with respect to speculation. Often in the form of day trading. ETFs can be effective tools to day trade, but it is a tough business to be in. The number of losers vastly outweighs the successful speculators.
Fortunately, the majority of investors take a long-term buy and hold approach with ETFs. I strongly suggest you follow this approach.