10+ Best ETFs for traders – Overview of ETFs that are suitable for active and short-term trading

With an ETF you can diversify or hedge your portfolio and actively trade market themes

ETFs, or exchange traded funds, are funds that trade exactly like a share. However, unlike shares, ETFs represent an index rather than a company. There are now 1,000s of different ETFs available. These funds offer traders and investors exposure to indices replicating everything from broad markets to narrow industries.

ETF Trading / ETFs for traders
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While ETFs were originally introduced for long term investors, they have now become effective instruments for traders operating across timeframes ranging from minutes to months. In this article, we discuss the “ins and outs” of ETF trading and introduce some of the best ETFs for traders to use.

What is ETF trading?

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ETF trading covers any strategy involving ETFs apart from buy and hold investing or fundamental investing. ETF trading is all about market themes, money flow and sentiment, rather than fundamental analysis of individual shares. Sectors, industries, regions and countries fall in and out of favour, and traders can use ETFs as tools to ride the short, medium, and long-term trends that result from money flowing from one part of the market to another.

Why use ETFs for trading?

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One of the biggest advantages of ETFs is that there are thousands of them out there, and they each focus on a specific type of share or asset. Whenever there is a dominant theme in the market, there is probably an ETF focussed on that theme. ETFs are just one of many tools a trader can use, along with individual shares, futures, options and CFDs. However, ETFs offer far more alternatives than any other instrument. The best ETFs for traders are those that cost very little to trade and track the index they are supposed to track closely.

How ETF costs affect ETF trading

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There are three costs that ETF traders and investors need to be aware of. Firstly, unlike mutual funds, ETFs trade like stocks. That means there is a bid-offer spread – and bid offer spreads amount to a trading cost. Every time you buy or sell an ETF you are trading across the spread which costs money. Because professional traders have high turnover, they should only trade the ETFs with narrow spreads.

When trading ETF shares, you will also have to pay trading fees or commissions. The commission you pay depends on the online broker you use, not the ETF itself. When trading ETFs you should however be aware of the commission you would pay if you were trading similar futures or CFDs. In most cases, the commission will be similar, but you should always check and go with your cheapest option, while taking liquidity into account.

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The most commonly quoted ETF costs are annual management fees. These vary from about 0.05% to over 2%. However, these management fees are subtracted from the value of the ETF over the course of an entire year and therefore amount to very little over periods of days or weeks. Management fees are relevant for long term traders, but not an issue for short term traders. The best ETFs for traders are therefore not necessarily the ones with the lowest management fees, but the ones with the lowest bid offer spread.

Higher liquidity leads to lower spreads, and liquidity is therefore the most important consideration. Some brokers also offer commission free ETFs. These are ideal for trading, provided there is enough liquidity – again liquidity is everything. If you are trading leveraged ETFs, you should also be aware that interest fees can accrue over time. These can be a drag on performance over longer periods, making these funds better suited to day trading.

What kind of ETFs are suitable for trading?

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The best ETFs for traders are those that fit a specific theme, and as mentioned are very liquid. At any one time, there is usually a topical theme in the market. It may be tech shares vs. banking shares or growth vs. value stocks. It may be emerging markets, or Asia, or Europe, or a particular country, or a region. Or it may be risk appetite, volatility or small cap stocks vs. large cap stocks. There is an ETF that you can trade for almost every theme that arises.

Common ETF trading strategies

ETF Concept
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Finding the best ETFs for traders is half of the story. The other half is choosing a trading style and strategy. This will depend on your schedule, your personality and other factors, just like it will for any trading instrument. ETFs can be traded over any time frame, but remember, on very short time frames, very liquid ETFs are the best ETFs for traders, while on long time frames, the best ETFs are those with low management fees.

Increasingly, ETFs are being used by professional traders for day trading. ETFs are ideal when an index or sector is on the move. With the right brokerage account, you can also use leverage (by trading on margin) and sell ETFs short. Or, you can use leveraged ETFs or inverse ETFs which are ideal for day trading as well.

Trader / Rear View
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ETF swing trading strategies allow traders to profit from trends and reversals that last for 2 to 10 days. Swing trading is possible with any ETF that is trading within a clearly defined channel or range. If the trend is up, wait for an index or ETF to trade down to the bottom of the channel, and then wait for a bullish reversal before entering. If the trend is down, look for a bearish reversal at the top of the range. This can be done on hourly and 4-hourly charts.

For longer term trading and investing various ETF trading systems can be created and used. Rotational ETF trading strategies can be used to continuously move capital to the exchange traded funds with the highest momentum. Long term investors can also use ETFs to build an asset allocation strategy based on value, growth or other factors.

Overview of the best ETFs for traders

SPDR S&P 500 ETF Trust (SPY)

Snapshot S&P 500
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The first ETF ever listed was on the S&P 500 index and was the Vanguard S&P 500 ETF. However, the SPY product is now the ETF of choice amongst traders. This ETF on the S&P 500 has become the most actively traded ETF in the world. The fund currently has assets under management of $247 billion.

The S&P 500 index is widely used by speculators, hedgers and passive investors, which has resulted in a range of derivatives and retirement products being based on it. This makes it amongst the most liquid instruments in the world. The S&P 500 also happens to represent the 500 largest companies in the world’s largest economy giving traders excellent exposure to equities.

Invesco Nasdaq ETF (QQQ)

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When technology and growth shares are in the spotlight, the best ETFs for traders are those tracking the Nasdaq index. The stocks of Apple, Amazon, Google, Microsoft and Facebook make up 46% of the fund. These are the stocks that have led the bull market since 2009, and this has been the ETF to be invested in over this period. The fund is also prone to volatility when growth or earnings are called into question, leading to lots of opportunities for short term traders. QQQ is now worth $70 billion.

VanEck Vectors Semiconductor (SMH)

Semiconductor Manufacturing
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The best ETFs for traders to use are those that have large amounts of capital flowing in or out of them. The semiconductor industry is at the forefront of global growth and industrial production. When investors are betting on growth, the stocks in this industry, and the SMH ETF often rally. Likewise, when there are concerns about growth, volatility and short-term opportunities arise.

iShares China Large-Cap ETF (FXI)

Chinese Equity Market
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ETF trading allows traders to move their attention to wherever there is action. Increasingly the action is focussing on companies based in China. This fund includes Chinese key companies like Tencent, China Mobile, Ping An Insurance, Petro China and China Construction Bank. The fund is only worth $4.5 billion, but it still has plenty of liquidity.

iShares MSCI Emerging Markets ETF (EEM)

World / Emerging Markets
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Emerging markets are a risk-on asset. When markets in general are bullish, emerging market stocks often come into favour. Large funds also use the EEM ETF to quickly gain exposure to a wide range of emerging economies, and traders can ride that wave of buying if they get in quickly enough. There are several emerging market ETFs to trade, but this is the most liquid. It includes companies like Tencent, Alibaba, Samsung, Baidu and Taiwan Semiconductor.

iPath S&P 500 VIX Short-Term Futures ETN (VXX)

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The VIX is an index of implied volatility on S&P 500 options contracts. Futures, and now ETFs, can be traded on this index, which reflects the market’s expectation for volatility, and therefore uncertainty and fear. This means that as a trader, you can profit as volatility rises, or buy volatility ETFs to hedge other positions in your portfolio. Volatility ETFs are only suitable for short term trading due to the way they are structured.

To bet on falling volatility, you can buy the ZIV Inverse Volatility ETF which rises as volatility falls. Just be aware that inverse volatility ETFs can fall as much as 90% when volatility spikes. These inverse ETFs should only be used for intraday trading, or when volatility has already spiked and is beginning to fall.

iShares 20+ Year Treasury Bond ETF (TLT)

United States Treasury Savings Bonds
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US treasuries are often viewed as a barometer for the state of the US and even the global economy. ETFs like the TLT fund allow you to profit from rising bond prices (falling yields), while the ProShares Short 20+ Year Treasury ETF (TBF) allows you to profit from falling prices (rising yields). These are an excellent tool for traders to speculate on long term interest rates and inflation. They can also be used to hedge the volatility of longer term ETF portfolios.

Invesco DB US Dollar Index Bullish Fund (UUP)

US Dollar Index Charts / Dollar Bills
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USD strength and weakness is a major theme driving global markets. The US Dollar index is a trade weighted index of currencies, priced in USD. By trading the USD index, you can trade this theme directly, or you can use it to hedge positions in other ETFs. To bet against USD strength, you can buy the Invesco DB US Dollar Index Bearish Fund (UDN).

SPDR Gold Trust (GLD)

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Gold is the ultimate safe haven, and Gold is the one asset that’s likely to appreciate when everything else falls. Not only can Gold ETFs be used to bet on falling risk appetite, but it can be used to hedge riskier positions in emerging markets or growth sectors of the equity market. Gold is also a tool to speculate on rising inflation or a falling USD.

Vanguard Small Cap ETF (VB)

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When risk appetite amongst investors rises, some of the best ETFs are those invested in small cap stocks. There are several options to choose from, but the Vanguard Small Cap ETF is one of the most liquid. It is invested in 1,400 companies, all of which are worth less than $20 billion. This is an excellent fund to own during strong bull markets.

Other options for ETF trading:

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While the above funds are amongst the best ETFs for traders, there are plenty of others to consider. Here are a few more funds worth considering for ETF trading:

  • Utilities Select Sector SPDR Fund (XLU) – The utility sector is viewed as defensive and sometimes rises during mature bull markets.
  • Financial Select Sector SPDR Fund (XLF) – The financial sector is another very active part of the US equity market worth watching.
  • SPDR S&P Biotech ETF (XBI) – The biotech industry offers opportunity and risk to traders with nerves of steel.
  • Vanguard FTSE All-Wld ex-US (VEU) – A fund that invests in every global equity market except the US.
  • Vanguard FTSE Europe (VGK) – If the European equity market is outperforming, this is the fund to watch.
  • High Yield Corporate Bond (HYG) – When junk bonds are in focus you can look for opportunities in this ETF.
  • Invesco DB Commodity Index Tracking Fund (DBC) – Commodity prices can experience strong trends from time to time – this is the fund for those occasions.

Conclusion: Benefit from the best ETFs for traders

Trading ETFs is an excellent way to trade around market themes and sentiment. While fundamentals are important for long term investing, an ETF trading strategy is the best way to capture short and medium-term trends that develop due to changing political and economic narratives. A core long term investment in ETFs can therefore be complimented with more active ETF trading strategies.

Now that you know which ETFs to trade with, all you need to do is find the right strategy to fit your personality and schedule. Do you actively trade with ETFs? What’s your ETF trading strategy? What are your favourite ETFs for traders? Please let us know your thoughts and feedback in the comments below.

About Richard Bowman
Richard Bowman is a writer, analyst and investor based in Cape Town, South Africa. He has over 18 years’ experience in asset management, stockbroking, financial media and systematic trading. Richard combines fundamental, quantitative and technical analysis with a dash of common sense.