ETF Investing – Hedge Investments

Long Term Hedging
Many investors look to exchange traded funds to help them diversify their portfolio by diversifying their overall holdings. This exposes the portfolio to industries and sectors that are represented in the underling index. This diversification spreads the risk in a portfolio across a broad range or industries and sectors which help to mitigate risks associated with undesirable price movements in one single sector or industry. The high liquidity of ETFs makes ETF investing through hedging a great way to mitigate the risk of investments. In fact, liquidity is the most desirable characteristic of ETFs that make them great for hedging.

Short Selling
Short selling is a short-term hedging strategy that works well with ETF funds . Just as the long term hedging strategy discussed above can help to mitigate risk associated with undesirable price movements, so can short selling, except with short selling it is done in a much more direct way. Many investors will take a short position when ETF investing in order to reduce or get rid of the exposure of their portfolio in those sectors that they anticipate weakness. How this works is that a drop in a portfolio’s value as a result of price change in an underlying stock, is offset by a short position in the ETF as the ETF’s price drips. Highly liquid ETFs help to facilitate this ETF trading strategy because as the market rebounds, short positions can be closed out and the investors can take full advantage of the growth in those sectoas that were previously weak.

Derivatives
In the ETF market , some ETFs have derivatives connected to them. These can include put options that can protect against undesirable price movements by locking in a current sell price in the anticipation that prices will fall. It can also include selling futures contracts on an ETF when ETF investing. Basically, when exchange traded funds have more derivatives tied to them there are even more opportunities available to investors to mitigate risk using hedge investments.

Please read about Japanese Candlesticks , in addition to ETF investing, which are the fastest way for new investors to quickly and accurately read stock charts. Once you are comfortable with the major candlestick signals and you know how to read stock charts , expand your expertise by learning the various secondary Candlestick Patterns . Combine these with your favorite Technical Analysis indicators, such as the moving average , and you have the perfect trading arsenal for evaluating stocks, currencies, commodities, or Exchange Traded Funds.