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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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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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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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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So if there are still worries about the stock market and there is going to be recession in the economy the rational idea is to short the index. However if a trader does not have a margin account and don’t want to have one, ETF Short becomes the right choice. Unlike Mutual Funds one can buy and sell ETFs on the exchange during the trading session just like ordinary stocks.

Usually Short ETFs can be categorized in to following three types:

1.)   Normal Short ETF: In this type of ETFs a trader gets returns equal to the fall in the market i.e. if the market falls by 2% value of this ETF goes up by 2%. Some of the popular Short ETFs are Short S&P 500 ProShares (SH), Short NASDAQ-100 Index (PSQ), Short Dow Jones Industrial Average SM (DOG), and Short Russell 2000 Index (RWM).

2.)   Double Short ETF: In this type of ETFs a trader gets double the returns in case the market falls i.e. if the market falls by 2% then the value of this ETF goes up by 4%.

3.)   Ultra Short ETF: Some of these Ultra Short ETF offers a trader to get 2.5 times the returns if the market falls i.e. if the market falls by 2% value of this ETF will go up by 5%. Some of the popular Ultra Short ETFs are UltraShort NASDAQ-100 Index (QID), UltraShort Dow Jones Industrial Average SM (DXD), UltraShort S&P 500 Index (SDS) and UltraShort Russell 2000 Index (TWM).

Today traders do not need to worry about the falling markets so either you already are invested in the current market and want to hedge your risk by taking an inverse position or if you believe markets are going to fall you can deal in these ETFs and take advantage of the situation.

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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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Initially when the International ETF was introduced for the traders based in United States they offered Eastern Europe, Latin America and Southeast Asia in the same fund termed as emerging-markets. Now days you can trade on the metal prices on exchanges in India and China, one can play on political ambiguity in Turkey, business located in small but strong economy like Malaysia thanks to ETFs. The instruments offered today gives strength to the investors to invest in any economy in any part of the world, and all the different verities of products.

International ETFs are increasingly becoming popular with the current financial crisis. As performance of U.S. markets is facing the consequences of recession and since it’s not true for other Asian and Emerging markets traders are investing in ETFs that manage their funds in those markets. In the past if the developed countries were in recession it would hurt the emerging market’s performance as well, however today local businesses in emerging markets are so strong that recession in developed economies have little effect. By investing in International ETF traders can hedge their current positions in the local exchanges or they can just square off their local positions and only invest in emerging markets where today there are more opportunities to earn profits.

Depending on the changing market forces and changing conditions of different economies of the world banks and financial institutions offer funds that would help the investors make profits. Some of the popular International ETFs are as follows: iShares MSCI Emerging Markets Index (EEM) - these funds have given great returns if you look at the change in its Net Asset Value. Their Top 5 Holdings include Samsung Electronics Co., Ltd. (GDR), Taiwan Semiconductor Manufacturing ADR, Itau Unibanco Holding S.A. ADR, Petroleo Brasileiro S.A., Petroleo Brasileiro S.A. ADR. Likewise there is iShares Trust FTSE-Xinhua China 25 Index Fund, iShares MSCI Brazil Index Fund, iShares MSCI South Africa Index Fund and many more.

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