According to a US study, personal finances are a major source of regret for 77% of Americans. More specifically, 22% of respondents regret not investing earlier for their retirement. It’s never too early to invest, but before diving into the stock market, it’s crucial to educate yourself. When considering the best strategy to maximise gains without excessive risk, ETFs quickly come to mind. An ETF (Exchange Traded Fund), also known as a tracker, is an index fund that aims to replicate the performance of underlying financial assets, typically a stock market index. ETFs are issued by authorised management companies (e.g., Amundi, BlackRock) and differ from traditional funds by being continuously traded, meaning they can be bought or sold throughout the day, just like shares.
Also read: What are the best ETF brokers?
The benefits of ETFs
ETFs offer several advantages that explain their popularity. The two main benefits are diversification and low costs, enabling investors to build winning strategies.
- Portfolio diversification: Your ETF can track the performance of a broad equity index like the FTSE 100 or S&P 500, a sector-specific index (energy, tech, commodities, banking), or a bond index. With a single ETF purchase, you replicate the performance of dozens or even hundreds of assets!
- Low-cost instrument: ETF fees are affordable, averaging around 0.30% annually, with a range of 0.09% to 0.90%. This is cheaper than traditional actively managed equity funds and far less expensive than buying individual assets.
- Reduced volatility: As ETFs are baskets of shares or other assets, their prices tend to fluctuate less sharply than individual stocks during market swings. Similarly, they’re less vulnerable to sudden crashes.
- Optimise investment strategies: Beyond low-cost access to diverse markets, leveraged ETFs (long or inverse) allow investors to amplify gains or hedge positions. Some "strategy ETFs" incorporate sophisticated approaches, such as reducing underlying volatility.
The 5 best ETF strategies for your investments
⚠️ Building an investment portfolio starts with simple questions: What is your investment purpose? (e.g., retirement, property purchase, or emergency savings). What is your time horizon? What is your risk tolerance? How much risk are you willing to take relative to your return goals?
These questions are essential, as the answers determine the most suitable strategy. For example, a 10-year+ horizon may suit a buy-and-hold strategy, while a shorter timeframe might align with swing trading or sector rotation. Your trading skills and knowledge of technical/fundamental analysis also influence whether you adopt an active or passive approach.
In any case, ETFs are flexible and liquid, allowing you to adjust positions until you find the most comfortable setup.
Finally, successful investment strategies take time to deliver results and shouldn’t be seen as a get-rich-quick scheme. Start with realistic, achievable goals.
#1 - Buy-and-hold investment
This classic, time-tested strategy involves buying financial assets and holding them long-term, typically for 10+ years. Thanks to their low costs, diversification, and broad selection, ETFs are among the best long-term investments available today.
A popular approach is to buy and hold low-cost index funds. Historically, a broad index fund like an S&P 500 ETF outperforms most actively managed portfolios over a 10-year+ horizon.
#2 - Dollar-cost averaging (DCA) strategy
This method answers the question, “When should I invest?” For beginners or those avoiding market timing, DCA involves investing a fixed amount regularly, regardless of market conditions.
DCA smooths out market volatility by spreading investments over time (buying fewer units when prices are high and more when prices are low). Ideally, invest monthly in a diversified ETF, such as a global equity ETF, to balance risk and return.
This strategy is particularly effective for long-term investors seeking steady wealth accumulation through compound growth.
#3 - Asset allocation
Asset allocation means spreading investments across major categories like equities, commodities, and bonds to minimise the impact of a downturn in any single asset class.
ETFs’ low entry thresholds make it easy for beginners to implement a risk-appropriate asset allocation strategy.
Example: Young investors in their twenties might allocate 100% to equity ETFs for long-term growth. Later, when planning major life changes (e.g., starting a family or buying a home), they could shift to a less aggressive mix with more bonds to protect against market dips.
Note: While many ETFs are diversified (especially index ETFs), some track specific sectors like tech or energy. A sector-wide decline is possible, so diversifying across asset classes adds security.
#4 - Sector rotation
For experienced investors, sector-specific ETFs offer a way to capitalise on market cycles by shifting allocations between sectors like healthcare, tech, finance, or energy.
Example: If an investor believes a sector is overvalued, they might sell the corresponding ETF and pivot to a more promising sector for the next cycle.
#5 - Seasonal trend investing
ETFs are effective tools for profiting from seasonal trends.
Two well-known trends:
- The “Sell in May and go away” phenomenon: Historically, US equities underperform between May and October compared to November-April.
- Gold’s seasonal rise: Gold prices often climb in September and October due to high demand in India ahead of wedding season and Diwali.
Beginners could profit by buying a gold ETF like the SPDR Gold Trust (GLD) in late summer and closing the position a few months later. However, seasonal trends aren’t guaranteed, so using stop-loss orders is advisable.
Also read: Top 5 profitable strategies for cryptocurrency trading
