The expanded form of ETF is Exchange Trade Fund. Over the years, ETFs have become a popular trading tool. Day trading in ETFs (shares) is one of the many commodities where trading on the basis of ETF is done. Divergent views prevail whether ETF is suitable as a tool for Day trading. The value of an ETF is the weighted average relating to the stocks forming part of it. As for the risk factor, the ETF controls it, but such funds are inclined to move in lower swings than the normal stocks. A mathematical formula applies here. The top member of the ETF is lower than its highest and vice-versa.
Day trading is basically about chasing the stocks or bonds that move in one direction or the other. But the variations in prices need to be enough for the trade to materialize and enable the trader to earn profits. With low shifts, more transactions are necessary to reap large profits.
Day Trading in ETFs cannot be dismissed outright as cumbersome which gives less profit. Comparing to trading in stocks profit is definitely less. But ETFs have some decided advantages.
Advantages of Day Trading ETF’s
- Day trading in ETFs restricts the potential return on any given trades, but the returns are assured, barring drastic adverse developments taking place in the market.
- For an ordinary Day trader, one has the choice everyday to move with the market. (in normal conditions) But it has been observed during the last few years that Day trading ranges have shrunk, opportunities are less to evolve a Day trading strategy. Swing trading of large moves, which needs several days of wait and watch, has taken over the opportunities for the Day traders. Switch over to ETFs and deal in stocks in quantity has been found to be a better substitute to earn profits.
- The chances of slippage are less. The high volume and conglomeration of a large number of stocks provide avenues for large positions.
- The wise Day trading investors include to the trading list a reasonable chunk of ETFs on selective basis, as per the prevailing conditions in the market on a particular day.
- Day trading is both risky and highly rewarding. The chances of loss in ETFs are minimal.
- Since Day trading is strictly monitored by Securities and Exchange Commission (SEC) ETF Day trading automatically qualifies for such ‘protection’. Specific restrictions are put on “pattern day traders” who do four or more buys and sells (round trips) in a 5-day period. If the trades are more than 6% of their total number of trades during the period, the trader is bound to maintain an equity (cash and stock) value of at least $25000.
- ETFs are not as volatile as individual stocks.
- To make huge profits, heavy capital investment is required. This is the disadvantage of ETFs.
- ETFs can be used as the components of both short-term and long term investment options. With trading flexibility and low expense ratios, they can be good alternatives to traditional mutual funds.
- ETF s is useful tools to invest in broad-market indexes like S& P 500, the Nasdaq 100, etc.
Finally, the assertion that ETFs are tangible options between individual shares and mutual funds can be logically accepted. They are relatively safe for Day trading. They have part advantages of both options with no disadvantages.