Are ETFs for trading, investing, hedging or all of the above?
Exchange-traded funds are popular securities used by everyone from long term investors andshort term traders. Many ETFs, such as the S&P 500 SPDRS, are used by long term investors,many of whom prefer their low cost to similar products like no-load index mutual funds. On theother hand, leveraged exchange-traded funds - such as those offered by ProShares, Rydex andDirexion - are better suited for short-term traders who are better positioned to take full advantageof the 2x or 3x daily returns sought by leveraged ETFs.
What are some of the benefits of using ETFs compared to stocks?
One of the biggest benefits of investing and trading in ETFs is that exchange-traded funds helpinvestors and traders avoid single stock risk. Single stock risk refers to the potential for any onestock to create a disproportionate effect on a given stock portfolio. While a trader or investor whobuys a stock runs the risk that the stock could actually go to zero (not an unrealistic possibility inthe age of Bear Stearns and Lehman Brothers), a trader or investor who owns the XLF or theUYG - both exchange-traded funds that include a variety of stocks - is far less affected shouldone or even two of the stocks that are in their ETF collapse or, worse, fall to zero.
Exchange-traded funds also give stock and ETF traders easy access and diversification in stocksand stock markets from around the world. One popular vehicle for trading and investing inChinese equities is the
iShares FTSE/Xinhua China 25 ETF
(NYSE:FXI - News).
What are some of the benefits of using ETFs compared to mutual funds?
Low cost, transparency and flexibility are among some of the reasons why more and moreinvestors and traders are turning to exchange-traded funds and, in some cases, leaving theirmutual funds behind. Transaction costs for ETFs are typically much lower than those for mutualfunds. Those who own ETFs can also learn with a few mouse clicks exactly what their ETFsconsist of and in what proportion - something that is often not the case with many mutual funds.
What are leveraged ETFs?
Leveraged exchange-traded funds offered by a number of ETF underwriters seek to producetwice or even three times the daily return of their underlying benchmark. Because the leverage in