Squaring off your positions:

One of the obvious reasons why one should sell ETFs is for booking profits. So let’s say you have been in a long position for a while now and you want to take out some or all profits then one can sell the ETFs and get profits out of it. Also if one believes that now the market is not going to take the price of this ETF any further one can choose to square off their long positions.

Reducing downward risk:

So if one is heavily invested in the market and is feeling the risk of turbulent markets he/she can choose to sell an Index ETF so to hedge their current positions. So even if the markets turn downward still shorting ETF would at least keep an investor away from heavy losses.

Reducing downward industry risk:

If one has good amount of investments in a particular sector or a commodity he/she should consider taking a short position for sector ETFs or Commodity ETFs respectively. So let’s say a trader is bullish about Information Technology sector and have heavily invested in several stocks belonging to that sector he should also sell I.T. Sector ETFs to hedge their current positions.

Reducing your risks in Futures and Options:

Weather you have invested in equity, index, ETFs or futures and options you can use ETFs to hedge your risks. So let’s say you are bullish about the Crude Oil prices and you are long on Crude Oil Call options, you can sell Oil ETFs to gain an exposure to the downside risk you might have if the Crude Oil Prices fall.

Bearish about markets:

If you are a firm believer that markets are going to fall, in that case also you should consider selling Index ETFs. Additionally, within all the sectors if you think that a particular sector is going to perform the worse you can also consider selling that sector’s ETF.

Therefore, if you want to hedge your current positions, book some profits or take advantage of bearish market you can consider selling ETFs.

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Taking a Put Option Long Position

Just like any other Put Options, ETF Put Option offers a trader to get an exposure or hedge the downward fluctuations in the market. Basically, with put options a trader has a right to sell an ETF at an agreed up-on price (strike price). For example, if a trader goes long on April 150 put he has a right to sell the respective ETF for $150 and a trader can execute this right anytime before April.  Even if the respective ETF trades at $120 trader can sell the ETF at $150.

Taking a Put Option Short Position

When a trader goes short on put options, he gives a right to the other party who has a long position on that put to sell the ETF at the agreed upon strike price at any time before expiration. This is an opposite of having a long position but it is similar to going long on a Call option. For example, if you take a short position on an April 150 put for $20, a trader would want these ETFs to not go below the $150 mark or else he might start incurring a loss on his investments.

Taking a Call Option Long Position

With this type of Call option a trader has a right to buy the agreed quantity and type of Exchange Traded Funds at a certain price (the strike price). So if a trader takes an April 150 Call option Long position, he has a right to buy the respective ETF for $150 anytime before April. Therefore even if the price of the respective ETF climbs to $170 a trader in contract can still buy that ETF for $150.

Taking a Call Option Short Position

As part of this strategy a trader can take a short position so you want the value of ETF to decrease. So if a trader sells April 150 Call option for $12, he will make money if value of the respective ETF never goes above $150.

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Market ETFs are financial instruments that are created to keep a track on a particular index with the objective of closely replicating it unlike mutual funds which does not closely follow the index but it tries to outperform the index. Usually these ETFs hold the stocks which belong to the index it is tracking.

Reasons for Trading Market ETF

Following could be the reasons why you should trade in Market ETFs

i)                    To hedge your current positions

ii)                   To capitalize on a market opportunity

Therefore if being a trader you want to hedge the risk of your current positions, market ETFs can help you reduce that risk. Whatever may be your positions, you can go long or short with market ETFs and reduce your portfolio’s risk.

On the other side one can also trade in Market ETFs for capitalizing on an opportunity. May the opportunity be in any part of the world there would be an ETF with the help of which you can get an exposure to that market or index. Further, Market ETF offers a portfolio of a particular index so to get an exposure to an index trader can stay away from the hassle of investing in multiple stocks of that index.

Characteristics of Market ETF

One of the top reasons why a trader should consider investing in Market ETF is because of its less volatile nature in comparison to Sector ETFs or any other Funds. To replicate the performance of index, Market ETFs invest in stocks of all sectors and industries which make them less volatile when compared to other Sector focused ETFs. However, some market situations like declining or rising economy can work against this scenario and can make Market ETFs turbulent.

Apart from these characteristics Market ETFs of course have the benefits which all other Exchange Traded Funds have like lower expense ratio, lower taxation and lower management fees. Additionally, just like stocks one can buy and sell ETFs on the exchange during the trading session.

If you are a trader currently not investing in Market Exchange Traded Funds here are some of the top performing funds:

• PowerShares QQQ Trust Series I (QQQQ) – This Market ETF invest in 100 stocks from NASDAQ
• iShares MSCI Germany Index Fund (EWG) – Tracks German index
• TraHK – This Market ETF tracks the Hang Seng index

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1.) Easy Trading

ETFs’ stock like feature makes it easy for individual investors, institutional investors and hedge funds to buy and sell these instruments. Unlike Mutual Funds one can trade ETFs on the exchange anytime during the trading session.

2.) Hassel Free Management

For some of the Index ETFs the prime goal of their establishment is to track the performance of an Index as opposed to Mutual Funds where they might look at outperforming an Index. Hence the risk associated with ETF is low coupled with low management fees.

3.) Futures and Options

If a trader is looking to use Futures and Options for hedging their current positions they do not need to think about the learning curve or directly get involved in risky F&Os instead one can invest in Derivatives ETF.

4.) Cost Effective

If these funds are compared with other available funds, ETFs have lower expense ratio and lower management fees.

5.) Transparency

All of the holdings of Exchange Traded Funds are broadcasted on daily basis. This feature keeps the investors satisfied as they can find out where their investments are being utilized.

6.) Taxes

When ETFs are compared to Mutual Funds then ETF wins the race for Capital gain taxes which are comparatively low.

7.) Hassel Free Portfolio Investment

If a trader believes that a particular sector is going to be a top gainer in near future he has an option of investing in a particular stock which belongs to that sector and keep a track on the price. This becomes risky since it’s hard to predict which stock will be a winner amongst all and also it’s a hassle to continuously keeping a track on the price. Instead trader can invest in Sector ETF which invests in several companies that belongs to that particular sector and in turn trader can stay out of the hassle.

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There are several types of ETFs available in the market for taking advantage of available profit opportunities and to cater to investor’s requirements. Today if trader believes that a particular sector is going to outperform all the other sectors he does not need to take a risk of going all in on a particular company he can instead invest in Sector ETF where investors money is invested in multiple companies in that sector. Likewise there are Commodity ETFs (Which includes precious metals like Gold), Index ETFs (To take advantage of the index volatility), International ETFs (To bank upon emerging markets and their currencies) etc.

If your sentiments are encouraging you to invest in a particular direction and if you choose to invest in ETFs it’s important to find out the ETF List together with their ratings. Today there are many websites where you can find the ETF List namely: Yahoo Finance, Google Finance, MSN’s Money Central, Money Morning, The Street and many more. Different websites have different ways of displaying this data; some websites only show all the available ETFs while at some websites one can view the ETFs based on which bank or financial institution offers them, based on their type, based on their performance and other permutations and combinations.

One also needs to carefully look at the ratings given to these funds. All the websites have their own way of rating these funds like “The Street” has the following categories for rating the ETFs A is Excellent, B is Good, C is Fair, D is Weak, E is Very Weak, + (Plus Sign) rating belongs to the top third of its letter grade, - (Minus Sign) rating belongs to the bottom third of its letter grade.

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