Using ETFs to Execute a Macro-Oriented Strategy

There are innumerable macro oriented trading strategies that can be profitably applied to global financial markets. Of course, not all strategies work in every type of environment and good traders rarely rely on just one. It is always important to try to select the optimal strategy for the prevailing market conditions. In recent years, one of the most popular trading strategies has been global macro, where traders place bets on movements in a myriad of different asset classes including stocks, bonds, commodities and currencies. Macro traders take a holistic view of the entire world financial landscape.

Whereas equity traders, for example, may pay close attention to individual company data, macro traders are more concerned with big picture developments. Instead of breaking down Netflix's NFLX latest earnings report, these traders are more likely to be following geopolitical news and commentary from global central banks. Global macro trading has increased in popularity for a number of reasons. First, ever since the financial crisis, intervention on the part of governments and central banks has created a market environment where policymakers can yield enormous influence over asset prices. Instead of focusing only on economic reality, traders must now also be able to interpret how policymakers will react to that reality.

Under these circumstances, many asset classes have become highly correlated and price action has been driven by policy developments. For example, correlations in the stock market are near all-time highs. This means that the vast majority of stocks move in the same direction as the overall market on a daily basis. Such an environment can be difficult for long/short equity traders because there is less differential in how individual securities perform. Not only are correlations high between individual equities, but they are also high between stocks and other markets.

For example, on most days when the EUR/USD rises, stocks and commodities will follow. As price action continues to be driven in large part by policy maneuvers, many traders are choosing to focus on the big picture, global landscape where central bank action and geopolitical events can drive sustained momentum in various asset classes. The other reason why this type of trading has become more popular is the efficiency with which it can be executed. The futures market, where traders can trade stock indexes, commodities, bonds, and currency pairs has been the traditional domain of macro traders. These markets tend to be deeply liquid and it is easy to go both long and short any futures contract. They also offer significant leverage.


The rise of ETFs, however, has allowed more market participants to easily and efficiently execute macro trades. In fact, traders now have the ability to execute a fairly robust global macro strategy simply by trading ETFs through a stock account. The versatility that these ETFs now offer is impressive. There are securities that track most of the major global stock markets, U.S. and global bond markets, commodities, and currency pairs. One drawback of some of these ETFs is a lack of liquidity. For many of the major macro markets, however, there are large ETFs with plenty of daily liquidity.

These would include the SPDR S&P 500 ETF SPY, the PowerShares QQQ Trust ETF QQQ, the United States Oil Fund ETF USO, the SPDR Gold Trust ETF GLD, and the iShares Barclays 20+ Year Treasury Bond ETF TLT, to name a few. There is now an ETF for almost any kind of asset class that is traded. Furthermore, there are ETFs that offer 2x and 3x leveraged exposure on an intra-day basis to certain asset classes as well as those that offer leveraged short exposure to the same asset classes.

These ETFs can be used not only to execute a global macro strategy, but also to hedge. For example, a trader with a large long position in U.S. stocks could hedge a portion of their portfolio by purchasing the iShares Barclays 20+ Year Treasury Bond ETF TLT or the PowerShares DB US Dollar Bullish ETF UUP, which tracks the performance of the greenback. In the case of a steep decline in the stock market, both of these ETFs would likely rise, offsetting some of the losses in the trader's equity portfolio. Whether you are looking to build out a global macro strategy based on fiscal and monetary policy actions or are just looking for efficient hedging vehicles, the wide variety of ETFs now trading on U.S. exchanges offer traders both efficiency and flexibility across global markets.