Learning Hedging with ETFs: A Cost-Effective Alternative 5.00 / 5 (100.00%) 1 vote

Many investors can benefit from transactions that involve exchange traded funds. ETFs can typically appeal to just about all level of investors because of how easy they are to work with and how their uses continue to remain fluid. Newcomers to ETF trading should keep in mind that they have many more uses outside of the realm of mutual fund substitution. One of their most versatile uses involves hedging. In fact, hedging with ETFs a cost-effective alternative, has been the title of many materials that sing the praises of all related investment opportunities. Because they are traded more actively on exchanges, they are much more liquid and versatile than most types of mutual funds. Learning how to hedge with ETFs, as such, will allow most traders to have additional degrees of versatility in their investments.

Understanding the hedging potential involves looking into what ETFs can do in a financial setting. They can be used much like derivatives, such as futures and options in order to take short or long positions in any investment portfolio. Investors who are especially interested in hedging their portfolios against potential inflation will be able to connect their returns to commodity prices through the use of targeted ETFs. For beginning investors, a combination of the right ETFs can also be used to replicate just about any commodity based portfolio.

ETFs can also be used to help with stock market hedging as well. Investors will typically use their futures and options throughout their stock market careers in order to hedge positions or take simple short term replacements when they plan to exit or enter the market. Among the most common tools for such equity market are S&P 500 futures. Though the mechanics that are involved in using most short equity ETFs function differently than futures, they can still be properly utilized, even if the matching is not always easy to precisely calculate. Through the use of ETFs, the traders position can also ultimately be unwound whenever it is needed, unlike futures contracts, which can expire regularly.

It can be just as easy to working with hedging with ETFs a cost-effective alternative when working with currencies as well. Much like with equity market hedging, before ETFs, the only way to hedge with investments outside of the United States was to work with currency forward contracts. These contracts could be used to between different investors as agreements over larger entities being traded. With ETFs, however, individuals can look into a variety of foreign exchange options and be able to trade them with a greater degree of freedom. With all of these available advantages, it is easy to see why so many traders are interested in working with ETFs. In order to make the most of their investments, beginning traders are encouraged to carefully research all of their potential opportunities when it comes to finding the right ETFs.