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Hedging Strategy -
ETFs are effective hedging tools for managing
risk. For example, investors can guard against over concentrated
equity positions by using ETFs as single stock substitutes. This
hedging technique can reduce risk and volatility by letting
stockholders diversify away from large equity positions to the
companies they own or work at. Also, inverse performing or short ETFs
allow investors to hedge against a market decline.
Leverage Strategy -
Like individual stocks, ETFs can be leveraged with margin. Margin is
borrowing money from a broker to buy securities and involves
considerable risk. Minimum maintenance requirements are enforced by
FINRA (Financial Industry Regulatory Authority), the NYSE and by
individual brokerage firms. While margin investing can be profitable
for investors correct about the direction of their holdings, the
interest charges or borrowing costs can deteriorate returns.
Sector Rotation Strategy
- Convenient market exposure to various
industry sectors is readily obtained with ETFs. By tactically shifting
assets, investors can over and underweight specific sectors according
to their financial research, economic outlook, or market objective.
Owning or selling concentrated business segments allows ETF investors
to capitalize on both positive and negative sector trends.
Tax Loss Harvesting Strategy
-
Wash-sale rules don’t permit investors to realize a stock loss if they
repurchase the same stock within 30 days. This problem can be avoided
with smart tax loss planning. By redeploying the loss proceeds into an
ETF in the same sector as the stock, for example, the wash-sale rule
can be avoided. This allows investors to offset any capital gains with
capital losses and still maintain market exposure.
Options Strategy -
ETF investors have a multiplicity of option
strategies at their disposal. purchasing call or put options is an
aggressive technique. An options investor can control a large amount
of ETF shares by paying a premium. The premium price is a fraction of
what it would cost to purchase the shares in the open market. This
provides an options investor with a great deal of leverage and a high
risk/reward opportunity.
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