How To Use ETFs To Trade The Current Market Conditions?

For investors, 2022 has been quite a year. Sterling plummeted against the US dollar to trade at levels not seen since Brexit, and the equity markets have haemorrhaged cash. Market darlings including Apple, Amazon, and Netflix stocks are now down from their 2022 highwater marks by 15.96%, 35.31%, and 70.85%, respectively.

Taking a view on the next market move is made difficult by the number of variables in play. Inflation concerns and interest rate hikes top the list for many. There is also the question of Covid, fresh lockdowns in China and a global supply chain which never properly recovered from the events of 2020. Throw in a dose of geopolitical uncertainty in the form of the Ukraine-Russia conflict, and the only certainty at the moment appears to be that there is no certainty.

Nasdaq 100 Index – 2022 Sell-Off

Source: IG

Navigating the current market successfully requires a back-to-basics approach, and diversifying positions to spread risk and smooth out returns has never been more important. But the art of diversification is constantly evolving. The traditional 60:40 strategy, which gained popularity in the 1970s, promoted allocating 60% of available capital to domestic equities and 40% to government bonds. That approach doesn’t accommodate the new markets and instruments such as ETFs, which have sprung up to offer a new way of optimising returns.

Diversify Using ETFs

Whether you’re new to investing or an old hand, the booming ETF (Exchange Traded Fund) sector offers a cost-effective way to gain exposure to a wide range of instruments with the click of just one button.

ETFs operate similarly to traditional funds, and investors can gain access to a basket of assets that a specialist provider manages. Those firms don’t pick stocks and try to outperform the market; instead, they aim to mirror the performance of a sector. The passive nature of the management technique means that the annual average costs of ETFs are below 0.50%, and as they trade using live prices, you can buy into and sell out of an ETF at any time – there’s no need to wait for a month-end dealing date to come around.

With so much uncertainty in the markets, the good news is that the ETF industry has evolved to cover nearly every corner of the financial ecosystem. It’s possible to buy a single ETF which offers exposure to specialist sectors such as solar energy, global large-cap stocks or government bonds. The performance of markets so far in 2022 highlights the risks, and ETFs offer a way to manage the threats while keeping enough exposure to the markets to benefit from a rally.

iShares Oil & Gas Exploration ETF

Source: IG

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About the author: Justin Freeman

Justin is an active trader with more than 20-years’ industry experience of working for big banks and hedge funds. He has an inside knowledge of how the financial markets work, thanks to roles including trader on a $750m Event-Arbitrage desk and CRO and COO of hedge funds running a variety of strategies. From stat-arb and trend-following CTA to fixed-income relative value. Firm’s he has worked at include big banks like Citi, and prominent hedge funds including D. E. Shaw and Millennium Capital Management.

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