ETF Investment Strategy: Active Trading Can Lead to Losses

ETFs were brought into being by marketing people from the Toronto Stock Exchange who saw a way to beef up trading volume. Unlike mutual funds, which can be bought and sold only at day’s end, ETFs trade throughout the day. In a flash, you can plunk a million in the stock market. A few seconds later, you can sell it all.

Yipeee!

Remember: Just because ETFs can be traded throughout the day doesn’t mean you have to or that you should trade them!

The vast majority of ETF trades are made by institutional investors: managers of mutual funds or hedge funds, multibillion-dollar endowments, pension funds, and investment banks. These are highly trained, incredibly well-paid professionals who do nothing all day but study the markets.

When you go to buy, say, the Financial Select Sector SPDR ETF (XLF) which represents stocks in the financial sector , you are betting that the price is going to go up. If you are day-trading, you are betting that the price will go up that day. If you are selling, you are betting that the price will fall that day.

Someone, most likely a highly educated financial professional with an army of researchers and computers more powerful than the FBI’s, someone who does nothing but study financial stocks 80 hours a week (for which reason his wife is about to leave him) is on the other end of your transaction.

As you sell, he — we’ll call him Chad — is buying. Or, as you buy, he is selling. Obviously, Chad’s vision of the next few hours and days is different from yours. If either of you has any idea which way financial stocks are headed, well . . . Do you really think that you know something Chad doesn’t? Do you really think that you’re going to get the better end of this deal?

Obviously, lots of ETF traders think they are pretty smart because ETFs are among the most frequently traded of all securities.

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