1.)    Costs involved: It is often talked about and is true in the majority of the cases that ETFs are the most cost efficient when expense ratios, management fees and brokerage fees are looked at. However, one should compare ETFs with the comparable mutual funds or indexes before making any decision based on the costs. One other thing to point out is commissions so if you are a trader you should also consider this expense before you start trading ETFs.

2.)    Objective: A Trader should be clear about his objectives and goals before taking an ETF position. One should ask himself/herself on why are they taking ETF position? Is it because they want to gain an exposure to a particular index? Or they want exposure to a particular sector? Are they looking to hedge their current positions? Whatever may be the reason one should figure out what are their objectives before narrowing down to a particular ETF.

3.)    Taxation: Even though ETFs have a tax advantage over other comparable Mutual Funds or other comparable financial instruments when talking about International ETFs it turns out that taxation part is not so gracious.

4.)    Time Line: Trader should think about for how long he/she wants to stay invested in a particular financial instrument because there are pros and cons of different ETFs based on their preferred time horizon.

5.)    Fully Research the ETFs: One of the best aspects about ETFs is the way how information is shared with current and prospective investors. Most updated scripts or securities held by ETFs are being shared openly. So if you are scoping out feasibility, you should start analyzing holdings of all the ETFs being considered by you. If you are looking at an Index ETF you can find out how ETFs have diversified their portfolio, if you are looking at Emerging Market ETFs you can find out which countries this ETF is focusing on, for sector ETF one can analyze the companies these ETFs have invested in.

So consider these aspects before you narrow down to a particular ETF.

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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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Exchange Traded Notes are in a way a combination of bonds and Exchange Traded Funds. They were first issued by Barclays Bank PLC. Generally, notes are type of secured bonds with fixed returns and with principle protection but Exchange Traded Notes are unsecured debts, the returns of these notes depend on how good or how bad the markets perform and there is no protection of investor’s principle how one would have in case of bonds. ETNs can also be stock like bought and sold on the exchange during the trading hours, this feature of ETN matches with that of ETF.

One feature that helps the traders to differentiate between ETN and ETF is that there is a maturity associated with ETNs, so one can trade the ETNs on the exchange or wait for the maturity and get the principle and the gains or losses on that particular day. One aspect that may affect the price of these notes is the credit rating of the issuer of the notes. Therefore, even though there is not much change in the price of index, the value of exchange traded notes may fall due to the drop in the credit rating of the issuer. As per the IRS’ tax guide lines normal tax rates will be applicable on gains from currency ETNs as opposed to ETFs where capital gain taxes are applied. So when ETNs are compared to ETFs from taxation perspective ETNs loses its edge.

There are different types of Exchange Traded Notes available in the market today. However, the four major types of ETNs are Currency ETNs, Commodity ETNs, strategy ETNs and Emerging Market ETNs. Most of you might be aware about three of the above four types but Strategy ETNs. So what are strategy ETNs? Strategy Exchange Traded Notes are associated with the performance of the index. So Index Long and Index Short are examples of strategy ETNs.  Two of the popular ETNs offered by Barclays are iPath CBOE S&P 500 Buy Write Index ETN (BWV) and Barclays GEMS IndexTM ETN (JEM).

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Institutional investors, Banks and Hedge Fund managers have already tried and tested ETF Funds so the popularity and growth seen in the recent years is due to these set of investors. Financial Guru’s and Researchers believe that the growth will continue since ETF funds have started attracting ordinary traders as well. If we look at asset growth then during the year 1995 approximately little over a billion dollars were invested in ETFs, then in year 2000 it grew to $62 billion approximately, in year 2005 it was around $300 billion and last year in 2008 it shoot up to around $540 billion.

Authorized participants act as a liaison between the investors and the ETF sponsors. They are the only party which deals with the sponsors and are also known as the market makers. In absence of market forces with the help of Arbitrage authorized participants try to bring the market price of ETF near to the current net asset value. More over arbitrage is not carried out to facilitate the investors or the ETF sponsors but it is done to earn a prospective profit out of it.

One of the important features of Exchange Traded Funds is the availability of information, institutional investors and banks that offer these funds fully share their holding details (as opposed to mutual funds who is unwilling to share their holding details). Additionally, a comprehensive detail of the holdings of a particular ETF also helps the traders to make a decision on including an ETF into their investment portfolio. Since holding an ETF is like holding stocks of several companies, it provides more diversified portfolio which is less risky and of course by investing in ETFs one is staying away from managing and daily tracking of bunch of stocks.

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With the introduction of Index ETFs the prime reason why traders are more attracted towards these investment instruments is because of the stock like flexibility it provides. Due to its popularity this type of funds not only adds new traders but it also encourages current index mutual fund investors to switch. Since ETFs can be traded on stock exchange during the market hours, investment managers can take index position to capitalize on the situation or limit their risk in bad times.

Some of the most popular Index ETF are:

1.)   iShares Russell Midcap Index (IWR): Investments of these funds are more focused on the mid cap stocks listed on Russell. Top holdings are TJX Companies, Avon Products, Precision Castparts Corp., Marsh & McLennan Companies, H.J. Heinz Company etc.

2.)   iShares Dow Jones Select Dividend Index (DVY): This fund is a perfect match for the investors that like to invest in dividend paying stocks. Top holdings of these funds are Lorillard Inc., Centurytel Inc., Eastman Chemical Company, VF Corporation Entergy Corporation etc.

3.)   iShares S&P 500 Index (IVV): Fund Managers here are focused on investing in good scripts listed on S&P 500. Top Holdings of these funds are ExxonMobile Corporation, Microsoft Corporation, GE, J.P. Morgan Chase, Procter &Gamble Company etc.

May it be Institutional Investors or active hedge fund managers, they all have one thing in common which is they all love Index ETFs. For these investment managers when it comes to increasing their exposure to the broad index or hedge their current positions they go for Index ETF purely because of its convenience.

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Several different types of ETF are being offered to ordinary traders. One can keep away from the hassle involved with holding physical commodities or precious metal and can buy Commodity ETFs. Likewise, if one is optimistic about the overall markets they can buy Index ETF and if someone thinks that markets are going to fall then they can buy Index Short ETFs. If the local economy is facing recession then one can invest in the Emerging markets Index ETFs or Currency ETFs of Emerging Markets. One of such products introduced and is very popular amongst traders is Sector ETF; Fund Manager who manages this fund invests money into companies of a particular sector.

If a trader believes that a particular sector is going to perform better based on the current market scenario in the past they used to invest in a particular company which belongs to that sector. Investment of this type becomes risky since you are weighing a huge part of your portfolio into one company. By investing in Sector ETF trader is taking advantage of the whole sector and at the same time staying away from the risk of being heavily invested in a particular company’s stock. With Sector ETF there are sub categories, so there are funds available in the market which invests in companies of a particular sector but based only in one market, there are also some that invest in a particular sector’s companies domiciled locally as well as internationally.

Some of the popular Sector ETF is as follows: Merrill Lynch Retail HOLDERs (RTH): These Funds invest in companies of retail sector based in the United States. Retail HOLDERs is listed with NASDAQ, top 5 holdings of this fund are Wal-mart stores, Home Depot, Target Corporation, Walgreen Company and Amazon.com. Likewise there is Vanguard Information Technology ETF, Select Sector SPDR Fund – Financial, iShares Dow Jones U.S. Telecommunications Index Fund and many more.

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Generally there are two types of Exchange Traded Funds that deal in silver where a trader can invest. First type of ETF is where banks or financial institutions actually hold silver and Second type of ETF is where fund managers invest in the futures and options that track the price of silver. Both the types of ETF will move in the same direction as the current cash price of silver. Silver ETFs become a perfect investment for banks or institutional investors looking for short term gain or who wants to use this commodity fund to hedge their risks from other investments for a while. However, there are a limited number of investors who are looking for long term gains out of this precious metal based on its robust historical data and also because they want to play safe.

Some of the most popular Silver ETFs are as follows:

1.) iShares Silver Trust (SLV): This fund is quite old in comparison to others that offer Exchange Traded Funds in Silver, it is also one of the largest of all. SLV is a fund that holds physical silver and keeps the investors free of the headaches associated with holding precious metals. Today iShare Silver Trust holds silver worth $4.54 billion.

PowerShares DB Silver Fund (DBS): Unlike its counterparts this fund doesn’t hold physical silver but it invests in derivatives that track spot price of silver. Futures and options contracts these fund deal in are based on an index managed and developed by Deutsche Bank.

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What would you need to pick up and being with Exchange Traded Funds? If you are already a trader needless to say this but for those who has never traded into any kind of instruments, one needs to open up a brokerage account with a bank or financial institution. It would be really helpful to discuss how are the experiences of some of the clients of the broker you want to get associated with and also talk to the broker about your own investment plans.

Next would be to do a good research on the ETFs that interests you, then sort out the ones which you would like to buy and discuss these ETFs with your broker. Broker might look at the options and suggest you that according to him where should your money be invested based on the market research, expected future market conditions, growth aspects etc. Depending on your short and long term goals you can sort out the ETF investment that works out best for you.

Today the chances of market volatility is at the peak, not so while a go more than 85% of 401k’s were in red and in really bad shape. With 401k there is little in your control, but in case if you have invested in ETFs you can set up parameters. So if you are willing to take risk that if the funds value falls up to a certain limit you can bare the risk but if it falls further you can put a stop loss. With this feature you can put a limit on the losses you may have to bear in case market crashes.

You can put a trade order with your broker by phone or take help of the latest trading software and web based systems. Periodically meet with your broker or keep a check on your portfolio to see where you stand.

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All of you out there must be aware about mutual funds and how do they work, now here is a new more tax efficient and less expense prone investment. So expenses involved with ETFs are low and now comes the time to find out which ETFs best suits your requirement and matches your portfolio. There are many types of ETFs available today in the market, it always makes sense to invest in a particular sector rather than investing in a particular company’s stock so there are Sector Specific ETFs. With today’s market crisis one can hedge their risks by investing in Commodity ETFs which invest in Gold. Also in comparison to US markets Asian markets are performing much better so to take advantage of Asian markets there are international ETFs that invest in Asian indexes.

Once you have narrowed down the list of ETFs that you like, you should not directly jump into the market and start trading. It always helps to track a particular investment opportunity before actually investing in it. So if you are not using a Software or Web Based application you can visit Google or Yahoo’s Finance portal create your own portfolio for free, add the ETFs that you like and keep a track on the price movements. Once you have seen which ETF performs best for you and also fits perfectly into your portfolio. All you would need is to have a Brokerage account and your broker’s number or if you are using a Software or Web Based application open up your system and start trading.

Some traders find ETF trading perfect to hedge the risks from their current exposures, while some find the returns from ETFs lucrative so they invest major portion of their investments in ETF. Reason could be any for ETF trading but sure there is a great investment opportunity around the corner.

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A trader can trade in ETFs by below mentioned ETF Trading System:

1.) Broker: Like any other stock you can also trade ETFs through a broker and once bought you can see the funds directly into your brokerage account. Some traders have always been investing in stocks, futures or funds via their broker and they are comfortable with the same system of investments they believe “why get into the hassle of buying and selling yourself if your broker is one phone call away.”

2.) Software or Web Based Investments: Unlike the conventional investors there are also many who are diverting towards taking matter in their own hands and would like to take the advantage or get out of the market when the price is right. There are many Brokerage firms and Financial Institutions offering Software and Web Based Systems where in trader can see the market movements, take the decision and act upon it. Software or Web Based ETF Trading System offered today have excellent features such as:

-> One can set up triggers for taking advantage of the market movements and buying or selling the ETFs at the price which best works for you.

-> These systems also offer tips so if there is a good buy in the market that investor should keep an eye on the system will prompt to buy that particular ETF.

Before getting in the system and start trading firstly a trader needs to find out which ETF is best for him/her. There are several websites which offers a tracking system where in you can track a particular ETF for a while see where is it going and if the track record turns out to be as you expected you can then buy that ETF. Google and Yahoo’s Finance section also offers a feature where in you can track a particular ETF.

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If you are craving to increase your exposure to Asian indexes, may it be to hedge your risks in the American markets or to take advantage of growth in Asian markets, ETF investing is the answer. So there are ETFs available where in you can increase your exposure to Asian Markets for example: iShares launched four new ETFs earlier this year namely a.) iShares MSCI Asia APEX 50 Index ETF b.) iShares MSCI Asia APEX Mid Cap Index ETF c.) iShares MSCI Asia APEX Small Cap Index ETF d.) iShares MSCI Emerging Asia Index ETF.

In the same way if you are looking to invest in biotechnology because you think it’s a booming industry and you are not happy investing money in a single stock. At that time you can look at industry specific ETF investing. Some of the examples for industry specific ETFs are SPDR Retail ETF, Alternative-Energy ETF, iShares DJ US Oil & Gas Exploration & Production, iShares DJ Aerospace & Defense etc.

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Either you are a trader who’s bread and butter is trading or an investor who believes not to put all the eggs into one basket, you need to keep a track on how much you need to shed if you are investing in ETFs. If you are looking at tax there is already a noise about ETFs are the most tax efficient investments. While considering brokerage fees and the expense ratios there is a gap between costs involved with ETF trading and trading other instruments like Mutual Funds, Stocks, and Derivatives. ETF turns out to be least expensive investment while comparing these costs in relation with other instruments and also not to forget the benefits one gets by ETF investing.

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