Exchange traded funds (ETF) for small and medium investors
Most of the capital of small and mid-sized investors over the past 2 years has been invested in ETFs by sector in the US economy. Previous instruments, such as individual stocks and short-term forex trading, lost interest among investors as they required more focus on trading and information analysis. The global balance of power in this market has shifted and it is important to understand why.
To begin with, we need to be clear about how ETFs are viewed by individual retail traders, but not by institutional investors. It's also interesting to see what obvious (and hidden) benefits can be gained by investing in ETFs.
What is an ETF?
An ETF is an open-ended type of investment fund which can be freely listed on exchanges, like stocks or futures contracts. An ETF is a portfolio consisting of stocks and other assets (oil, gold, currencies and commodities) that are grouped according to their sector, industry or market (S&P500, stock indices of other countries). When you buy or sell an ETF, you are trading the entire "basket" of assets that make up that ETF.
The SPY ETF is legitimately considered the most liquid and popular ETF because it follows the dynamics of the S&P500 index. When you buy a SPY ETF, you are investing in the S&P500 index. This explanation is simpler and more correct.
A sector ETF (an ETF formed by a specific sector of the economy) is a diversified portfolio of stocks that consists of the best stocks of companies in that sector with stable dividends and less risk.
Simply put, an ETF is a convenient way to invest if you don't have the skills or time to build a diversified stock portfolio for yourself and considering investing in only one or two instruments is too risky.
This way of investing can provide good dividends and, given current market conditions, increase asset value (respectively earnings).
Small and medium ETF investors
Small and medium investors can be divided into 3 main groups. The main difference between them is the volume of investment.
The first group, the largest, consists of investors with small amounts in their accounts. For the most part, they work manually on an intraday basis. Traders who use automated trading systems are also included in this group.
For traders in this group, the ability to trade instruments such as SPY / UVXY / NUGT etc. gives access to highly liquid and volatile intraday trades in the first place. Another important aspect is that spreads on the most popular ETFs range from 1 to 3 cents and the volume-based commission is lower than that required for transactions in conventional indices.
An important advantage for this group is the following: when trading currency pairs, traders cannot use all possible speculative strategies due to the nature of their movement, but ETFs allow for a wide range of trading algorithms, especially for accounts with small deposits. Unlike popular currency pairs, ETFs allow trading with trends that last for months or a year, for example, rather than just a few hours or just a week.
At the moment, traders in the first group are beginning to trade with ETFs, which were previously unavailable to them due to small deposits in their accounts. Statistics show that the number of new ETF accounts will increase like an avalanche. We can expect ETFs to become as popular as currency trading in the near future.
The second group of small investors is the one to pay more attention to. It is the target audience that sees the true value of these instruments. This group is fairly stable when it comes to the amount of money in their accounts. The group shows the following trends:
- Traders use more sophisticated automated trading systems (compared to the first group). - They use services to copy trading signals. - They invest in ETFs based on specific economic sectors or assets (gold, oil, currencies and commodities). - The benefits of choosing ETFs as the primary trading instruments used in trading for the first element of the aforementioned list are similar for the first group of investors.
Finally, the third group of investors (as opposed to institutional investors) consists of investors with large sums of money in their accounts.
Most of these investors prefer to invest rather than speculate. In addition to the ability to invest in various industries, commodities and currencies in the form of ETFs, there is another benefit that ETFs have: they offer protection for open positions when major market indexes experience corrections or when markets undergo stages of increased volatility.