Read This Before You Trade Your Next ETF

Guest Article

Whether it’s soaring or slumping — and it often does both during the course of a week — the financial sector never falls far from investors’ radar.

That’s not news, of course. But what you might not know is that there are many ways to trade this sector, none of which involves buying or selling a single stock but, rather, making a single play on the industry as a whole.

How can you make one trade that gives you exposure (whether long or short) to banks, brokerages, insurance companies and other types of asset-management outfits? By adding Exchange-Traded Funds (ETFs) and ETF options to your investment arsenal, you only pay one commission (because you’re only buying/selling one position) to be exposed to the upside (or downside) of its various component stocks.

Know Your ETF Holdings

ETFs (and their options) have exploded in popularity in recent years. They offer securities that trade like stocks but are micro-focused in almost every sector in the markets (including international, commodity, short, ultra-short, etc.).

But there can be a great difference in the holdings, diversification and trade strategy of ETFs, even within one particular sector.

Let’s take a closer look at some of the various financial-sector ETFs “out there” so that you can see some of the many choices you have when you’re ready to add sector plays to your portfolio.

Among the group of financial ETFs are:

* iShares S&P Global Financials (IXG)
* iShares Dow Jones U.S. Financial (IYF)
* iShares Dow Jones U.S. Financial Services (IYG)
* Financial Select Sector SPDR (XLF)
* Vanguard Financials (VFH)
* Rydex S&P Equal Weight Financials (RYF)
* PowerShares FTSE Rafi Financials (PRFF)
* First Trust Financials AlphaDEX (FXO)
* PowerShares Dynamic Financials (PFI)

This list does not even include international, bank, insurance, preferred and other types of financial-related ETFs like the short and ultra-short ones that aim to give you even-greater leverage on smaller moves.

With so many choices, which one represents the smartest way to play the sector at any given time?

Weigh(t)ing Your Options

Not all ETFs are created equal, and that’s a good thing. The more choices we have, the more control we have over the performance of our portfolio.

Remember, the biggest benefit of trading ETFs and/or their options is that, instead of spreading your capital among several individual trades, you can bet on (or against) an industry with just one investment. That said, your responsibility is to learn exactly which underlying stocks make up each individual ETF.

And, to take it one step further, you should know just how the stocks are “weighted” within each ETF. That is, if 10 stocks are included one ETF, you probably won’t see each of them “weighing” an equal 10% of the overall ETF but, rather, some stocks will represent a bigger percentage than others.

Let’s examine the diversification and top holdings of the above-mentioned ETFs