Many people enjoy trading ETFs as they present a simple and diversified method of trading an index or commodity. Although investors may have a preference for certain ETFs, most investors do not have a preference. system instead for ETF trading. In this article, we’ll look at what an ETF is specifically, the benefits of ETFs, and a way of trading ETFs that can be lucrative and safe at the same time.

To start with the basics, ETF stands for Exchange Traded Fund. As its name suggests, it is a fund that is traded, like a stock, on a stock exchange. The fund tracks an index, a commodity, or a basket of assets. For example, there are funds that track various exchanges (such as SPY, which tracks the S&P 500 and is made up of over 500 selected stocks across 24 industry groups); there are funds that track a commodity (like SLV, which roughly tracks the price of silver); and there are funds that track other assets such as bonds, real estate (REITs), currencies, etc. ETFs cover everything from broad-based indices to international and country-specific indices and industry sector-specific indices.

The benefits of ETF trading are numerous. They include:

• Diversification over a number of assets and the relative stability of an index fund.
• Ability to buy as much or as little as you want, just as you would a stock.
• Ability to buy long or short, and with hedging strategies, just as you would a stock.
• ETF expense ratios are typically lower than most mutual funds due to lower marketing and distribution expenses and the fact that ETFs are generally not actively managed.
• Ease of investing in commodities that would otherwise be difficult to acquire (oil, for example, very complicated to physically own; or silver as another example – a $50,000 purchase of the physical metal is extremely heavy to take home!)
• Transparency both in the portfolio and in the price that is constantly updated throughout the day.

With this background, let’s look at a possible strategy to maximize an investment portfolio by adding ETFs.

First of all, always consider risk management. We suggest investing approximately 10% of your overall portfolio in ETFs, with each ETF representing only 1% of your total.

Next, focus on the concept of “warm hands.” Basically, you are buying the best performing funds from the recent past and holding them for the next period. We suggest using a period of one month. ETFs that perform well one month can be expected to continue to perform well the next. Start by shopping for the top 10 performing funds for the past month. Of course not all of them will do well, and each month you will remove the ones that fall from the top 10 list and add the new ones that make the list. By following this technique, you will always have the best performing ETFs in your portfolio! All you need is a list of the top performing ETFs and you simply select the top 10 – the work is done for you!

A final thought on how to maximize returns on your ETF portfolio is to take advantage of seasonal trends. Not all stocks (and therefore ETFs) act the same in bull and bear seasons. Although summer is considered ‘bearish’, Dow Utility stocks tend to be bullish during this time. In early April, you might want to start looking at “IDU” (an iShares ETF that mimics Dow Utilities). IDU is generally bearish from May to September.

When playing with an ETF like IDU, you are trading the entire index, not an individual stock, and this is important. When we look at deep underlying seasonal patterns, the effects of these are more visible across the entire market itself than on a single individual stock.

As winter approaches, the IDU tends to turn bearish, and our focus is more on the Dow Industrials, which is typically bullish from October to April. Again, we want to look at trading the entire index here, and a great way to do that is through the iShares “DIA” ETF that mimics the Dow Industrials.

In short, ETFs are a great way to play a sector of the market and have many advantages over regular stocks and mutual funds. By using some of the strategies we’ve discussed here, you now have an advantage over other traders, benefiting both your wallet and pocketbook!