Wonder why so many investors and traders lose money on the market? The answer is simple. They do not have a plan or a strategy that works.
Most of them invest randomly or follow the advice of some gurus on the internet, but the truth is that investment principles are straightforward but hard to follow.
In this article, we will present 5 ETF investment strategies that work, inspired by real examples and tested on the financial market.
ETF Investment Strategies: Definition in simple terms:
An ETF investment strategy is a comprehensive approach developed by traders and investors to identify the best funds to invest in according to their specific investment objectives.
In other words, those strategies assist in making buy or sell decisions based on specific tools and key data.
Every trader or investor needs a strategy to follow, rules to respect, and indeed its investment will be profitable.
An investment strategy depends on:
- the investment purpose (retirement, additional income)
- the time horizon (short/medium/long term)
- the capital required for the investment
- the risk aversion
- the type of assets on which the investment will take place
- the time devoted to the investment
- the impact of this investment on your wealth (is precautionary savings in place? liquidity of other investments)
Best ETF investment strategies
- Buy and Hold
- Market timing
- Dividend ETF
- Value Investing
1 - Buy and Hold
Buy and hold is one of the best ETF investment strategies, and it's simple to perform.
You only need to buy your ETF in small portions every time the price goes down. In that case, the average cost of your investment will be lower.
The main problem with this simple and easy-to-use strategy is that it relies heavily on your ETF-picking skills. If you pick the right ETF, your performance will be outstanding in the long term.
But if your pick is poor, your portfolio will struggle.
So we recommend you spend time picking your ETF if you are interested in the buy and hold strategy.
Another point is that you will need to pay the fees each time you buy, so it's better if you have a broker or investment app that charges low fees.
Check out our comparison page to get an idea of the fees presented by the best brokers in the industry.
2 - Momentum
This strategy believes that any assets following a strong uptrend will likely continue their trend. Why change a team that always wins.
To use this approach, investors rely either on technical analysis or indicators.
Recently, the phenomenon of FOMO(Fear of missing out) is a perfect example of a momentum following strategy.
Retail traders noticed that some stocks skyrocketed during the pandemic, so they wanted a piece of that.
Everyone started to buy, and the stock market rebounded heavily.
This strategy involves detecting those movements early on and buying aggressively until the momentum fades.
Examples of technical indicators that work with the momentum strategy:
Momentum: it is an indicator that measures the velocity of price changes in a given period and is used for the Momentum strategy
RSI(Relative Strength Index): The RSI is a measure of the momentum of a particular price, with readings below 30 signaling oversold conditions and above 70 overbought signaling conditions.
3 - Market timing
It's the most challenging strategy, but it is by far the most profitable. It relies on technical indicators and macroeconomic factors.
If you can identify the economic cycles, you are sure to know what specific markets will do. Which assets, sectors, or countries will benefit from inflation, a crisis, or a change in interest rates.
This strategy can also rely on technical indicators like the Moving averages:
Professional traders usually use the 200 and 100-day moving average. The crossing of the two on the upside (Golden Cross) and the downside (Death Cross) can be a strong signal for a market movement. Generally, this indicator is suitable for the Market timing strategy.
ETFs replicating a country, a sector, or a commodity are the most adequate for this strategy.
4 - Dividend ETFs
Since that ETFs holds stocks in their holdings, most of them distribute dividend. The exciting part is that some ETFs only invest in stocks with a high dividend yield.
This strategy requires a much bigger starting capital than other strategies because it depends on the dividend yield distributed by the ETF.
List of the Best Dividend ETFs:
- Vanguard FTSE All-World High Dividend Yield UCITS ETF
- SPDR S&P Global Dividend Aristocrats UCITS ETF
- Fidelity Global Quality Income UCITS ETF
5 - Value Investing
To perform this strategy, you need to have a good grasp of the economy, how central banks work, and how to read corporate financial reports.
It consists of pitching the undervalued sectors or countries that might super form in the future.
For example, Biotechnology ETFs were the ones to buy before and during the pandemic; they had great returns. You might have seen this opportunity if you had done your research then.
Currently, ESG ETFs might be the next undervalued sector. As everyone relies on Russian gas and oil, alternative energy might be the solution.
Other ETF Investment strategies
There are, of course, other strategies and techniques, but we selected the ones with the higher success rates and the reasonable risk.
A risky strategy, for example, is to use leveraged ETFs or short ETFs, if you think that the market will go down, you can buy an inverse or short ETF, and you will get the inverse performance of the Underlying Asset.
For example, if you buy a short ETF on the Nasdaq, if the index is down by 3%, then your ETF will be up 3%.
Those kinds of strategies are for more advanced and knowledgeable traders.
How to pick an ETF?
First, you must know how to pick the ETF that will meet your needs.
Here is a list of features and characteristics you must take into account before choosing:
- The size of the fund
- Management fees or expense ratio
- Past performance
The size of the fund: the more significant a fund is, the more likely it is to be financially efficient. The size corresponds to the Asset under management or AUM
ETF management fees or Expense Ratio: The Expense Ratio is calculated as an approximation of the costs related to administrative expenses, paperwork, and advertising that you will pay if you have this ETF in your portfolio. This cost will naturally be deducted from your performance.
Performance: the performance of an ETF gives a general idea about the profit or loss of the fund over time
Liquidity: liquidity allows you to buy or sell your share quickly. If the ETF is not liquid enough, you will have difficulties closing your position or being executed if you buy.
5 Rules for Successful Investing on ETFs:
- Define your goals: Why do you want to invest? Investment horizon? What is the proper level of risk?
- Asset class selection: How many asset classes? Which ones? Weight of each category in your portfolio
- Research on ETFs: Reading the Key Investor Information Document (KIID) to know the composition of the ETF, fees, risk profile...
- Selection of the best broker: The ETFs offered? The fees? The trading platform used
- Be patient and disciplined: Follow your plan, respect the rules of money management
Which strategy is best for beginners?
Buy and hold is the strategy that works well with beginners. The best thing you can do to get the best results from this strategy is select four to five ETFs.
The ideal portfolio will be something like that :
- Replicating a US Index
- Replicating a world index
- Replicating a sector or a specific country with tremendous potential
- A bond ETF
The portfolio allocation will depend on your risk profile and investment objectives.
If you are young, you can take more risks and invest most of your portfolio into equity. Still, if you are looking for retirement or steady income, you might consider having a more diversified portfolio.
Then you will need to put a recurrent amount each month or year to rebuy the same ETFs and hold. After some time, you will see unbelievable results.
To perform those strategies, you need a broker or an investment app that enables you to get the best spread, fast execution, a reliable platform, and great tools.
On our comparison page, you will get the right broker for you. Select your preferences, and we will present you with what you need.
Conclusion - Start investing right now
After reading this article, you reasonably understand what to do to gain significant investment experience.
Our strategies have worked before and will continue to perform well, but two things are crucial and on you, picking the right ETF and choosing the best broker.
Now that you have everything in hand, you should start investing today.
Depending on your strategy and financial goals, the ETF suitable for you might vary, but overall, the ETF that tracks a world index is the easiest and less risky pick.
Because those ETFs invest primarily in blue chips companies worldwide, the risk is manageable, and the diversification protects you when some countries or regions are in trouble.
Again, it depends on your objectives and times horizon, but the ideal is to own 4-5 ETFs that are diversified and cover the markets you think will perform.
Most asset managers hold one or two equity ETFs, plus a bond and international ETFs to get the best diversification possible.
Yes, Same as stocks, ETFs pay dividends, but because they hold several companies, you might get your part in cash or as a new share of the ETF. The distribution is usually on a monthly or quarterly basis.
Generally, most ETFs are safer than stocks, but some invest in exotic assets or unknown regions that might be riskier than some blue chips stocks.
The natural diversification of ETFs makes it safer than holding one company. The risk of having one stock is more significant than having 100.
Yes, you can, and we think that is the best decision as stock markets tend to perform over the long run.
And when you hold for the long term, minor corrections and the stress associated with it will be pointless.
But you must consider the annual fees you must pay to hold your ETF.
You don't need much money to start investing in ETFs; the price of one ETF range from $20 to hundreds of dollars.
But taking advantage of compound interest might be the play. But some hundred dollars periodically into your ETF portfolio, and you will see the magic of compound interests.