July 1, 2012 at 10:00 am by Richard Rittorno

Many of us will be opening our 401k and IRA statements in the next few weeks, and some will be scratching heads and thinking, I can do better than this 401k fund manager, especially looking at the ratio of profits to management fees. Are ETFs the way to do that?

Now I’m NOT suggesting stopping your 401k or IRA and going it alone. I am saying most of us can do as well as or better with some work. I know many people started online accounts alongside retirement accounts as an additional means of income, and it’s you I’m talking too.

Many are fearful of the market, especially with months like May and June. But the right attitude is to respect, not fear, the market. Understanding what is happening and how to profit from it will always give you the advantage over those not taking the time to understand their environment.

A long time ago a mentor in the business told me that when markets move into a bear trend, be prepared with your shopping list and look for companies on the sale rack. He’d walk around saying America is on sale, people get ready! That holds true for any market: it can easily be Russia is on sale!

Do you have your shopping list ready?

Now no one knows for sure when markets will return to bull mode, and yes, they are screaming today on the back of the EU summit headlines. But as I highlighted in Fridays morning coffee brief. we really do not have clarity or, I’d argue, an executable plan; at least not one that has been conveyed to markets yet.  It’s these two points that have many analysts wondering if the rally will fade. In fact I’ve heard this phrase on financial shows well over a dozen times already, early Friday morning when this was written.

An Exchange Traded Fund or ETF can be a great vehicle for beginners and even advanced investors looking for exposure with a particular market focus. Beginners can use ETFs to put together a portfolio without buying a series of stocks to be diversified. With that in mind I want share some rules I use when trading ETFs:

1)      Know the construction of the ETF. In other words understand what you are buying or selling, what stocks or assets the ETF is made up of, and also what weight is given to the individual names. For more information on ETF construction see Know your ETF risk .

2)      Just as in stocks, the trend is your friend a phrase I’m sure youve heard from either me or others.  It may seem simple but so many beginners break this rule. If the trend is lower, look for an ETF that takes advantage of the lower trend. You can always sell when the trend changes.

3)      There are many companies out there with similar ETF make-ups. Dont be afraid to compare the two side by side. Look at fees, asset weights, and check out the ETFs website. You’ll be surprised how small differences can make a big difference in performance. Don’t forget market sentiment can give an advantage to one in some cases.

4)      As with any equity, option, ETF or mutual fund, it is highly recommended you use limit orders especially in thinly traded ETFs that deal with emerging markets.

5)      Beware of when you trade. Trading in the first 20 minutes and last 20 minutes typically has higher volatility and wider spreads. Commodity ETFs need to catch up to their counterparts in the futures markets and often overshoot or undershoot the market. The time I like to buy is between 1:45 p.m. and 2:30 p.m. EST, when brokers are executing margin calls and selling off assets to bring client accounts into compliance.

6)      Trade for free. Because of the popularity of ETFs, many larger online brokers allow their clients to buy and sell ETFs with no commission. This means great savings when scaling into positions. Be sure to consult with your broker surrounding the terms of commission-free ETFs, and for a list they provide of commission-free ETFs.

7)     Homework does not go away because you own an ETF. Do yourself a favor and set up a watch list for each ETF, and include at least the top five weighted assets in the ETF in your watch list. These five assets will drive the ETF the most. Do your homework on these companies. If your ETF has its top five weighted names in the oil sector, like USO (quote ) for example, and oil is dropping you could be in for world of hurt.