ETFs Trading Guide: Can I Trade ETF Daily?

Can I Trade ETFs Daily?

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What is ETF Trading?

ETFs (Exchange-Traded Funds) offer an opportunity to invest in various financial assets through a single transaction. These funds are formed of securities and asset classes that trade as stock. ETF trading is the buying and selling of these funds on the stock market. Simplicity is the primary advantage of ETF trading, as the initial investment is lower than larger mutual funds while offering the same quality of diversification. Their low cost makes them easy to buy and sell, creating a highly liquid and volatile market.

ETFs are varied and have different management styles. Passive funds invest in one or more market indexes; for example, they can be formed to track the price of a specific commodity, such as gold or a larger index fund like the S&P 500 or Dow Jones. On the other hand, active ETFs select particular stocks or sectors to attempt to beat the market; these can be riskier investments.

Diversification alongside liquidity and flexibility makes ETFs attractive to investors with varying amounts of capital. Buying and selling ETFs between the opening and closing of the business day falls under the trading style of day trading. The volume of daily trades creates volatility in the market, making ETFs a candidate for day trading. Investors in this form look for opportunities deriving from quick price movements rather than long-term price trends. The most attractive prospects for day trading are those that incur the highest price movements over a single day, creating various investment opportunities.

ETFs vs ETNs

ETFs have a lesser-known cousin that also provides investment opportunities, ETNs (Exchange-Traded Notes). These funds are similar to equity bonds, while ETFs are similar to stocks. ETNs are unsecured debt notes issued by institutions, which track an index or various securities and trade on a major exchange like a stock. They can be held to maturity or bought and sold at will. If the underwriter goes bankrupt, the investor would be at risk of loss. Both ETFs and ETNs trade on the major exchanges with margin, meaning that positions can be taken above the amount available in the investor’s account.

Depending on the form of ETF invested, both ETFs and ETNs are subject to market and credit risk. ETFs tend to have higher liquidity than ETNs and offer better day trading prospects. ETNs, on the other hand, offer a better tax structure as capital gains are stretched across the ownership period, while ETF holders must pay short-term capital gains. ETNs are considered risky investments as the foundation of an entire portfolio.

Choosing an ETF/ETN

When selecting ETFs and ETNs to trade, liquidity is the primary desired characteristic. Day traders look for volatility, usually found through funds with high activity and low spreads (low annual costs to cater for the fund). Volatility generates day trading opportunities, as small price movements are speculated on with margin to exploit price movement as much as possible. Therefore, optimal funds for day trading are the most active funds available on the market. These follow the trends set by the significant mutual funds which dominate the market. For example, the S&P 500 and Dow 30 have various ETFs and ETNs that track their indexes. One of the most active ETFs is SPDR S&P 500 ETF Trust (SPY), while one of the ETNs with the highest trading volume is the iPath S&P 500 VIX Short-Term Futures ETN (VXX). Various other examples of Exchange Traded Funds and Notes operate on the market and are candidates for day trading due to a high daily activity level.

Best Time to Day Trade

The most advisable time for investors to begin day trading is shortly after the business day opens. US markets open at 9:30 am. Trends set around this time define the trajectory of the leading ETF/ETNs for that particular business day. Therefore, day traders tend to put their trades in motion around 10 am, which leaves enough of a gap for market trends to be identified and acted upon. The best time throughout the business day to trade, however, is when the larger fund tracked by particular ETFs/ETNs loses value. A dip in value creates even higher activity on the respective ETF, generating significant investment opportunities to trade with any trend. The general trend is for investors to buy when the larger fund is in a downturn (correction). Setting a stop-loss is advisable for any trade set, as the market can move against the investor unexpectedly. Risk management is required for all forms of investment.

Bottom Line

ETFs are a simplified form of diverse investment readily available on the stock exchange. Day trading ETFs is possible as there are various trading opportunities within the same business day due to market volatility. The ideal candidates for day trading are those with the highest trading volume, making them liquid and volatile. Well-researched and prepared investors can trade ETFs daily with a successful return. Opportunities are available on the market to trade both ETFs and ETNs. However, ETFs are more commonly day traded as they are easier to comprehend and utilise when compared to ETNs.

The most active funds offer ideal investment opportunities when considering ETF/ETNs for day trading. Investors can act upon each price movement; the most volatile funds are the most prosperous for investors. Those less experienced in the ETF market should operate cautiously, studying early market behaviour before placing their investments. As noted, risk management is required for successful ETF trading.


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