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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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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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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If you do believe in low but steady returns you are definitely going to invest your money in bonds, and for the risky investors out there in the current market situation it makes more sense to rather invest in bonds and play safe. Bond Exchange Traded Funds entirely invest in bonds. Bond ETF possess bonds and it works with different strategies like it may invest in U.S. Treasury bonds, High Yield bonds, from short to long term bonds. Like any other ETFs Bond ETF can also be traded like shares on the exchange during the trading session. Further, like International ETFs there are also bonds available which are being established in foreign countries, traders can take advantage of the rate differences by investing in International Bond ETFs.

Below are some of the popular Bond ETFs available in the market today:

1.) iShares Lehman Aggregate Bond (AGG): most financial securities that invest in bonds considers this ETF as a Benchmark. Based on their investment, these funds are deeply invested in short-term US treasury and government securities.

2.) iShares Lehman Intermediate Government/Credit Bond Fund (GVI): These funds are more inclined towards medium range government securities and credit bonds.

3.) SPDR Lehman High Yield Cond ETF (JNK): These funds are more inclined towards long-term but high interest treasury bonds and government securities.

According to some, Bond ETF is the best option for a complete beginner who has never dealt with trading in securities of any kind, and for the traders who understand the market forces should not invest in bonds. However in the current economic situation I would encourage traders to invest in Bond ETF.

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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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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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One of the most popular indexes in the world and the most traded exchange traded funds on the exchange tracks S&P 500. S&P 500 includes stocks of huge publicly owned companies which are traded on either of the two of the largest stock exchanges of United States; NYSE Euronext and NASDAQ OMX.

This index is better known in comparison to whole bunch of indexes managed by Standard & Poor’s which is part of McGraw-Hill.  So as part of S&P ETF, managers invest in the components of this index such as ExxonMobil, Citigroup and General Electric.

Some of the popular funds based on the S&P ETF are as follows:

1.)    SPDR S&P 500 ETF (SPY): This fund broadly tracks S&P 500 Index and invests in the stocks that are listed with the index and would replicate performance of the whole index. So usually the Net Asset Value of this Fund would walk hand in hand with the value of S&P 500’s value.

2.)    SPDR S&P Emerging Asia Pacific ETF: This fund seeks to strongly replicate the total return of S&P Asia Pacific Emerging BMI Index. This index mainly includes companies that are based in the emerging markets of Asia Pacific.

Profunds Ultra S&P 500 ETF (SSO): Day by day banks and financial institutions are finding new ways to lure traders to invest in their fund. One of those innovation includes the fund we are talking about right now, with this fund traders are offered an opportunity to multiply their returns on their investments. SSO offers double the daily return of the S&P 500, so if a trader is confident about the market and as per his sentiments S&P 500 is going to perform well then with this fund he/she has an option of multiply his gains by the use of margin money facility which is widely available these days.

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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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On the other side ETFs are completely opposite and comes into being with the stocks and not money. What I mean by this is Huge financial institutions already have invested billions of shares, so to create an ETF they strip off a part of their investment and gather a set of different stocks that fall under a particular category. Gathering a set of different stocks an index like fund is created which is being registered with a stock exchange and shares of that fund are being sold on the exchange. More shares of the fund can be added to the market if the financial institution decides to increase their investment in that set of different stocks.

Further, traders are choosing to invest in ETFs over Mutual Funds. Mutual Funds directly can be bought from Bank or Financial Institution with no sales charge or “load” but the management fees typically turns out to be high and on the other side you can buy or sell only at the closing price at the end of the trading session. ETF wins the competition if a trader is looking at ETF vs. Mutual Funds as the brokerage fees, expense ratio as well as taxes are lower with ETF and to top that ETF can be traded like a stock on the exchange.

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Below are some of the different varieties of ETFs available today:

1.)    Actively Managed ETFs: These types of funds are recently introduced in the United States. The very first Actively Managed ETF came into existence in early 2008 however it was liquidated by the end of 2008. All the information about actively managed ETFs are available in the markets, also on funds websites one can find daily updated list of securities in their portfolios.

2.)    Index ETFs: Some of the initial ETFs that came into being were Index ETFs, today most ETFs act as index funds which holds the stocks and try to replicate the act of a stock market index.

For example: iShares S&P 500 index ETF (IVV), iShares Dow Jones US Insur. Index ETF (IAK).

3.)    Commodity ETFs: Commodity ETFs are the funds that hold the actual asset and track the price of the underlying commodity and accordingly this ETF is traded on the exchange based on its Net Asset Value.

For example: Market Vectors Gold Mining ETF (GDX), SPDR Gold ETF (GLD).

4.)    Bond ETFs: They invest in Government treasury bonds, these funds are the best during the time of recession. People who stayed invested in stocks during the financial crisis not only lost their profits but also a part of their invested principle.

For example: iShares iBoxx $ High Yield Corporate Bd (HYG).

5.)    Currency ETFs: There are sub categories in this type of ETFs there are some ETFs which invest in multiple currencies and there are some that invest in a particular currency.

For example: Sterling Money Market ETF (XGBP), US Dollar Money Market ETF (XUSD).

6.)    Hedge Fund ETFs: Exchange Traded Funds over here tracks multiple hedge funds and follow their activities and/or strategies.

For example: Index IQ Hedge Mst ETF (QAI).

Now since you have made the decision of investing in ETF find the one that best suits your requirement and start rolling.

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