Which ETFs Are Right for You?
There are more than 2000 ETFs available to the individual investor and new offerings arrive daily. If you can think of an investment niche, there is probably an ETF for it, but that doesn’t mean you should consider buying it. ETFs with low trading volume can be sink-holes for your capital, having actual expense ratios greater than 20%. I’m not kidding!
Investing or trading ETFs should be done in a manner that accords with one’s areas of interest/expertise, risk tolerance, experience and objectives. Additionally, I recommend that you consider the following three factors.
The 3 V’s
At Hawkeye ETF, we only trade ETFs that have validity, volatility and volume.
Validity means that the ETF tracks its underlying market (index, sector, commodity or currency) well. In terms of tracking error, some ETFs are actually ‘broken’ and should be avoided. Many of the leveraged ETFs only claim to give accurate ‘daily’ results, and warn traders to expect discrepancies on a longer time-frame. In the case of Inverse ETFs, the tracking error can make the ETF unusable.
We also require a certain minimum volume, because volume narrows the bid/ask spread and guarantees sufficient liquidity to be able to enter and exit at will. Moreover, as trend followers, we simply want to hitch a ride on popular instruments and popularity implies volume.
Lastly, as active traders, Volatility is our friend, so we require ETFs to have sufficient Average TrueRange (ATR).