12 Renowned ETF Investing Strategies and How They Work

You name it, there’s an ETF for it.

With more than $6 trillion in assets under management in the U.S. alone, exchange-traded funds (ETFs) are big business, and it’s no wonder. These diversified funds include securities like stocks, commodities, and bonds and are available for trading via stock exchanges and brokerage firms. They can also be a convenient way to get exposure to otherwise tough-to-reach corners of the market. In fact, they’re bought and sold just like stocks, which makes them easy to access with a high degree of liquidity.

Composer can equip you with the right tools to manage your investments. In this guide, we’ll highlight 12 of the most accessible and popular ETF investing strategies, detailing how each could work for you. We’ll also include the names and tickers of some popular ETFs and discover how to search Composer’s deep and broad ETF database.

What is an ETF investing strategy?

ETF trading strategies identify the best ETFs to invest in based on their individual goals. These strategies help investors make better decisions about when to buy and sell ETFs by relying on specific approaches to data analysis. 

These analysis methods typically fall into two camps: fundamental analysis and technical analysis. Fundamental analysis examines macroeconomic indicators like central bank policies, global economic activity, technological advancements, and the impact of climate change. Technical analysis, conversely, focuses on examining price movements to discern patterns.

Why are ETFs good for your portfolio? 

ETFs are popular, but why? It’s simple. ETFs offer several advantages to savvy investors in the form of diversification, low cost, flexibility, transparency, and tax efficiency. Let's examine these benefits:

• Diversification: Because ETFs cover nearly every type of asset class traded today, and specialized ETFs can help you get exposure to otherwise hard-to-reach sectors and industries, they’re an efficient method for diversifying your portfolio.

• Low fees: ETF expense ratios are typically lower than those of actively managed mutual funds.

• Flexibility: Since they’re traded the same way as stocks, ETFs make investments convenient.

• Transparency: A majority of ETFs disclose their daily holdings. Even active ETFs that are less transparent usually provide monthly or quarterly disclosures.

• Tax efficiency: Capital-gains taxes are often lower with ETFs than other investment avenues, as their turnover is usually lower. Also, ETF redemptions are typically paid in-kind with securities, reducing capital gains.

ETF investment strategies

Now that you know more about the benefits of investing in ETFs, let’s explore 12 of the most popular ETF investment strategies––many ideal for ETF investors*:

1. Passive or index investing

This strategy involves buying and holding ETFs that mirror the performance of a particular index, such as the S&P 500. Investors following this strategy believe in the efficiency of markets and aim to achieve returns similar to the overall market.

2. Dividend investing

Some investors use ETFs focusing on dividend-paying stocks or fixed-income assets, like corporate bonds. These ETFs aim to provide a steady income stream while also offering exposure to stock market returns.

3. Dollar-cost averaging (DCA)

DCA involves purchasing assets on a schedule, such as once a month. This investment activity focuses on consistently building investment in an ETF over a long period despite each individual purchase being of various asset quantities. The advantage of this approach is that you’ll average the cost of your holdings. This will lead you to accumulate more units of the ETF when the price is low and fewer units when the price is high. 

4. Low-volatility investing

A significant component of investing is managing risk, and low-volatility investing is an excellent ETF investment strategy for doing that—especially in times of economic uncertainty. The more volatile a market is the more significant the potential risk. So, choosing ETFs with lower volatility is a solid strategy because low-volatility assets tend to exhibit better risk-adjusted returns over time. 

5. Leverage

A leveraged trading strategy, under the right circumstances, can provide a high return on investment (ROI). A leveraged ETF—one that doubles or triples the movement of whatever asset it tracks through applying derivatives and debt instruments—can exhibit growth exceptionally quickly, which is why they're a favorite of day traders. But these same leveraged ETFs can plummet in value just as quickly, leading to a highly volatile market. This approach is best employed by investors with a high risk tolerance who can afford to lose an investment.

6. Asset allocation

As a diversification strategy, asset allocation involves splitting a portfolio between different asset categories. This well-known investing tool is often employed with ETFs because of the low investment threshold for this type of investment. You can choose from dozens of asset allocations, perhaps the most popular being the 60/40 split, which involves allocating 60% of your investment funds into equities ETFs and the remaining 40% into bond ETFs.

7. Swing trading

Swing trading is making trades to capitalize on large swings in price. Unlike day trades, which aren't typically left open for more than 24 hours, swing trades can spread over a few days or weeks, depending on the speed of the asset's price change. Using a swing-trading strategy isn't necessarily as lucrative as it would be with a single stock, but it’s less susceptible to significant downward moves than single stocks are. 

8. Short selling

Short selling is usually considered a risky investment strategy, as it involves selling borrowed securities. But short-selling ETFs are often more forgiving than shorting individual stocks. This is because the risk of short squeezes—trading scenarios where securities that have been shorted heavily suddenly spike in price—is much lower with ETFs. The cost of borrowing for shorting ETFs is also much lower than the cost of attempting to short stocks with high short interest. 

9. Seasonal trends

Over time, investors have identified several exciting trends that occur in the financial markets with changing seasons. Among the most well-known is how most U.S. equities tend to underperform from May to October and then overperform from November to April. This provides opportunities for savvy investors to short stock-based ETFs during spring and then close their short position in the autumn after the market rebounds. But remember, these trends aren't set in stone. 

10. Hedging

Hedging is a method of protecting against investment risk. It's often the most recommended strategy for investors who have inherited a sizable portfolio of U.S. equities but are concerned about the risk associated with the decline of equities markets. In such a case, an excellent hedging strategy is to initiate short positions in broad market ETFs. This provides gains in your short ETF positions, which would offset any risks in your portfolio resulting from declines in the equities market. 

11. Sector rotation

Sector rotation involves moving investments from one industry to another when economic cycles determine that it’s advantageous. This makes sector rotation similar to investing along seasonal trends, although this doesn't rely on parts of the year. Instead, it follows the specific economic cycles of interrelated industries. 

12. Global diversification

ETFs provide an efficient way to achieve global diversification. Investors can use international and global ETFs, including commodities and stocks, to spread their investments across different regions, countries, and even emerging economies.

Invest in ETF-based strategies with Composer

ETFs can be a great entry point for traders because they offer diversification by tracking a broad index or asset class, reducing individual stock risk. They’re also highly liquid, allowing traders to buy and sell with ease. And executing on ETF strategies gets even easier with Composer. To begin creating ETF strategies using Composer, check out composer.trade and sign up for a free 14-day trial today.