How to Trade ETFs

Exchange traded funds (ETFs) are baskets of securities that trade intraday like individual stocks on an exchange, and are typically designed to track an underlying index. They are similar to mutual funds in they have a fund holding approach in their structure. That means they have numerous holdings, sort of like a mini-portfolio.

Each ETF is usually focused on a specific sector, asset class, or category. ETFs can be used to help diversify your portfolio, or, for the active trader, they can be used to profit from price movements. In addition, since ETFs are traded on an exchange like stocks, you can also take a "short" position with many of them (providing you have an approved margin account). A short position allows you to sell an ETF you don't actually own in order to profit from downward price movement. Note that shorting a position does expose you to theoretically unlimited risk in the event of upward price movement.

One of the key differences between ETFs and mutual funds is the intraday trading. Mutual funds settle on one price at the end of the trading day, known as the net asset value, or NAV. ETFs are traded on the exchange during the day, so their price fluctuates with the market supply and demand, just like stocks and other intraday traded securities.

Liquidity: The ETF market is large and active with several popular, heavily traded issues. This makes it easier to get in and out of trades. However, liquidity varies greatly, and some narrowly focused ETFs are illiquid.

Choices: There is a huge variety of ETFs to choose from across different asset classes, such as stocks and bonds. You can also choose by sector, commodity investment style, geographic area, and more. Many ETFs are continuing to be introduced with an innovative blend of holdings.

Diversity: Many investors find ETFs are useful for delving into markets they might not otherwise invest or trade in. Since they are baskets of assets and not individual stocks, ETFs allow for a more diverse approach to investing in these areas, which may help mitigate the risks for many investors.

Commissions and Fees: ETFs typically trade by commission, however, TD Ameritrade offers access to an extensive list of commission-free ETFs. In general, an ETF tends to be more cost-efficient than an actively managed mutual fund, because of its indexed nature. This often results in lower fees.

You can trade and invest in ETFs at TD Ameritrde with several account types. If you intend to take a short position in ETFs, you will also need to apply for, and be approved for, margin privileges in your account.

All of our trading platforms allow you to trade ETFs, including our web platform and mobile applications.

The thinkorswim platform is for more advanced ETF traders. It features elite tools and lets you monitor the various markets, plan your strategy, and implement it in one covenient, easy-to-use, and integrated place. This professional-level platform lets you perform advanced charting, test out strategies with paperMoney® and find new ideas, all in one advanced trading platform.

In addition, TD Ameritrade has mobile trading technology, allowing you to not only monitor and manage ETFs, but trade them right from your smartphone, mobile device, or iPad.

Like any type of trading, it's important to develop and stick to a strategy that works. Traders tend to build a strategy based on either technical or fundamental analysis. Technical analysis is focused on statistics generated by market activity, such as past prices, volume, and many other variables. Charting and other similar technologies are used. Fundamental analysis focuses on measuring an investment's value based on economic, financial, and Federal Reserve data. Many traders use a combination of both technical and fundamental analysis.

Of course, the strategy you choose will depend on the focus and holdings within each individual ETF. For example, a corporate bond ETF will depend o fundamental research, such as a company's credit rating, past and future earnings, as well as the economic outlook for their industry. An ETF that tracks a stock index, for example, will warrant a strategy built on technical data of that index, or fundamental analysis centered on how the stock market may be impacted by the overall economy, or a combination of both.

With thinkorswim, you'll have tools to help you build a strategy and more. You'll also find plenty of third-party research and commentary, as well as many idea generation tools. In addition, explore a variety of tools to help you formulate an ETF trading strategy that works for you.   

Whether you're new to investing, or an experienced trader exploring ETFs, the skills you need to potentially profit from ETF trading and investing should be continually developed. You'll find our Web Platform is a great way to start. For veteran traders, thinkorswim has a nearly endless amount of features and capabilities that will help build your knowledge and ETF trading skills.

You can also explore the ETF Market Center to browse ETFs, read commentary, and much more.