Maximize Returns: Effective ETF Investing Strategies

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Contributor, Benzinga
October 27, 2023

If you're looking to build a diversified portfolio, consider investing in exchange-traded funds (ETFs). These versatile investment vehicles offer exposure to a broad mix of stocks, bonds and commodities, generally with low fees and reasonable liquidity. 

The article reviews the best ETF investing strategies to help individuals achieve their financial goals. 

Understanding ETFs

An ETF is an investment fund traded on stock exchanges. It follows assets like indexes, sectors and commodities, offering several advantages over individual stocks. These benefits can include diversification, lower costs, trading flexibility and tax efficiency.

Different ETFs are available, like:

  • Index ETFs: Index ETFs track well-known indexes like the S&P 500, Nasdaq 100 and MSCI World, aiming to replicate their performance.
  • Sector/Industry ETFs: They focus on specific sectors, such as technology, healthcare, energy or consumer staples, giving exposure without buying individual stocks.
  • Commodity ETFs: These simplify investing in physical commodities like gold, silver, oil or agricultural products, allowing you to benefit from price changes without ownership or storage concerns.
  • Bond ETFs: Invest in fixed-income securities, including government, corporate, municipal or high-yield bonds, offering regular income and portfolio diversification.
  • Thematic ETFs: These ETFs invest in companies linked to specific themes, such as clean energy, artificial intelligence (AI), cannabis and gaming, offering a chance to invest in emerging trends with high-growth potential.

Explore some of the most effective ETF investing strategies to help maximize your returns.

Buy and Hold Strategy

Investors buy and hold ETFs long-term, ignoring short-term market fluctuations and counting on overall market growth for positive returns. Benefits include diversification, lower costs, tax efficiency and simplicity. ETFs provide broad exposure, have lower expenses, are tax-efficient and are easily traded.

However, investors risk missing other opportunities, face emotional stress and risk loss from factors like inflation or market downturns. Investors should consider their goals, conduct fundamental analysis and compare ETF costs to pick suitable ETFs for the buy-and-hold strategy.

Dollar-Cost Averaging Strategy

Dollar-cost averaging (DCA) involves investing equal amounts of money at regular intervals, regardless of the security price. This strategy can lessen the impact of market volatility and lower the average cost per share. ETFs are popular for investors looking to implement DCA. 

To get started, investors should choose an ETF that matches their objectives and consider factors like cost and performance. They should also determine how much and how often they want to invest, set up automatic purchases and periodically review and adjust their strategy as needed.

Sector Rotation Strategy

Sector rotation is an investment strategy where you shift your portfolio allocation among different sectors based on their expected performance in various business cycle stages. The goal is to capture higher returns by favoring outperforming sectors and avoiding underperforming ones.

To identify high-growth sectors, consider economic conditions, consumer trends, technology, competitive advantages and valuation metrics. In 2023, rapidly growing industries include information technology, home furnishings, sports gear, green manufacturing, safety equipment, telehealth services, online food delivery and the property sector.

To execute sector rotation with ETFs:

  • Choose an ETF tracking a specific sector
  • Determine the investment amount and frequency
  • Arrange automatic purchases through your brokerage account
  • Periodically review and adjust your portfolio

Risk Hedging Strategy

Risk hedging is a strategy to safeguard profits or limit losses when dealing with uncertain market conditions. It involves using different approaches with ETFs:

  • Hedging with inverse ETFs: Inverse ETFs move opposite to the underlying asset. For instance, if an investor holds the S&P 500 and expects a drop, they can hedge with an inverse S&P 500 ETF, like ProShares Short S&P 500 (NYSEARCA: SH). This action offsets potential losses.
  • Hedging with leveraged ETFs: Leveraged ETFs amplify returns using leverage. If an investor is bearish on the NASDAQ 100, they can hedge with a leveraged inverse NASDAQ 100 ETF, such as ProShares UltraPro Short QQQ (NASDAQGM: SQQQ). It aims to provide triple the inverse return of the index.
  • Hedging with options: Options grant the right to buy or sell an asset at a set price and date. To hedge a position in the Invesco QQQ Trust ETF (NASDAQGM: QQQ), you can buy a put option on QQQ. 
  • Hedging with currency ETFs: Currency ETFs track a currency's performance against another. If an investor holds foreign assets in a different currency, they can hedge against exchange rate risk with a currency ETF moving opposite to the foreign currency. For example, owning euros can be hedged with an inverse euro ETF like ProShares Short Euro (NYSEARCA: EUFX), which provides the inverse return of the euro against the U.S. dollar.

Factors Influencing ETF Performance

ETFs offer investors diversification, liquidity, low costs and transparency. Yet, several factors can positively or negatively influence the performance of ETFs.

ETF performance closely aligns with its underlying securities, influenced by regional or sector-specific market conditions and economic trends.

For example, ETFs tracking the U.S. equity market or specific sectors like technology or consumer discretionary tend to excel when the U.S. economy is flourishing and the stock market is up. Conversely, they may struggle when the U.S. economy slows and the stock market declines.

ETFs following emerging markets or commodities can incur losses during a global recession or crisis.

Global and Geopolitical Factors

Global and geopolitical factors like wars, conflicts, trade disputes, sanctions, elections, pandemics, natural disasters and environmental issues can impact ETF performance. These factors create market uncertainty and volatility, affecting the demand and supply of specific securities or commodities.

For example, conflict in the Middle East can lead to price fluctuations in ETFs tracking oil or energy because of production and consumption changes. Trade disputes or sanctions between major economies like the U.S. and China can pose challenges for ETFs tracking their currencies or exports from shifts in trade flows and exchange rates.

Government Policies and Regulations

Government policies and regulations in different countries or regions impact fiscal and monetary measures, tax rates, interest rates, inflation, economic growth and legal frameworks.

For instance, if a government initiates a stimulus package or a quantitative easing program, ETFs tracking its bonds or equities may benefit from lower interest rates and increased liquidity. Conversely, when a government imposes higher tax rates or stricter regulations on specific sectors or industries, ETFs linked to those areas may face challenges from increased costs and reduced profits.

Factors to Consider Before Investing in ETFs

Before investing in ETFs, consider the following factors:

Investment Goals and Risk Tolerance Assessment

Define your investment objectives and risk tolerance clearly. ETFs come in various types, like equity, bond, commodity or sector ETFs, each with varying risk and return potential. Your choice of ETFs should align with your investment goals and risk profile.

Evaluating Expense Ratios and Transaction Costs

ETFs typically feature lower expense ratios than mutual funds, leading to reduced management fees. However, purchasing or selling ETFs on the stock exchange incurs transaction costs like brokerage commissions, bid-ask spreads and market impact costs. Compare the total costs of different ETFs and select those offering the best value.

Researching Underlying Assets and Tracking Index

ETFs track an underlying index representing a basket of securities or market segments. To make the most of your investment, understand what the index measures, its construction and how it's rebalanced. Research the underlying assets and their performance history and choose ETFs with low tracking error and high liquidity.

Monitoring and Adjusting ETF Investments

ETFs are known for their benefits: diversification, low costs and tax efficiency, but they require ongoing attention. Regularly review your portfolio to align with your risk tolerance, time horizon and financial objectives. This review assesses performance, suitability and alignment with your expectations, employing tools to monitor ETFs. You also evaluate fees, liquidity and tax implications, ensuring you maintain a realistic view of returns and risks. Avoid impulsive reactions to market trends and stay committed to long-term objectives. An investment policy statement helps you define your allocation, risk tolerance and rebalancing strategy.

Adjustments may be needed in response to changing market conditions or personal circumstances. Rebalance your portfolio to restore your target asset allocation when deviations occur from market shifts or contributions/withdrawals. Consider switching to different ETFs for better performance, cost efficiency or tax advantages. Avoid overreacting to short-term fluctuations and making frequent changes that could lead to unnecessary costs and taxes.

Mastering ETFs: Maximize Returns, Minimize Risks

ETFs offer a powerful tool to help investors achieve the twin objectives of maximizing returns and minimizing risks. ETFs provide a range of options, from the simplicity of a buy-and-hold strategy to the precision of sector rotation and risk hedging for crafting a winning investment strategy.  

Frequently Asked Questions 


How does investing in ETFs work? 


Investing in ETFs works by buying and selling shares of an ETF on a stock exchange like individual stocks. Each share of an ETF represents a fraction of its underlying portfolio of securities that track an index, sector or theme.



Are ETF investments safe?


ETF investments can potentially be safer than individual stocks because of their diversification benefits and lower costs. However, they are not risk-free and can be affected by market conditions, economic trends, global events, government policies and fees.



Do ETFs have very focused investing strategies?


Yes, some ETFs have very focused investing strategies that target specific segments or themes of the market, such as ESG, AI or blockchain.

Anna Yen

About Anna Yen

Anna Yen, CFA is an investment writer with over two decades of professional finance and writing experience in roles within JPMorgan and UBS derivatives, asset management, crypto, and Family Money Map. She specializes in writing about investment topics ranging from traditional asset classes and derivatives to alternatives like cryptocurrency and real estate. Her work has been published on sites like Quicken and the crypto exchange Bybit.