Day Trading ETFs

Guide to Day Trading ETFs

Are you looking to learn the process of day trading ETFs? Due to the volatile nature of exchange-traded funds (ETFs), they are the perfect candidate for day trading. When combined with the right strategy, day trading ETFs can be one of the best and safest ways to generate consistent profits in the market. 

Day trading is among one of the best ETF trading strategies due to the high volatility environment. And this can provide you with very lucrative short-term opportunities.

High volatility means you can easily buy and sell ETFs anytime during trading. Those of you who’ve traded individual stocks likely found themselves stuck in a situation where you can’t unload shares due to low volatility. Fortunately, with the right ETF, you won’t be in this situation. 

Besides stocks, ETFs are very popular during day trading. They offer a lot of diversification compared to mutual funds, have high liquidity when trading, and have low costs. They are a good strategy to employ for trading or investing.

To make a long story short, exchange-traded funds are a basket of securities traded on an exchange. A money management firm buys a group of assets – like stocks or bonds – and then lists the group or “basket” on the market to trade. 

Typically, the purchased assets are designed to mimic the performance of an index such as the S&P 500.  

Where ETFs shine is their availability; you can get them for every major asset class. For example, equities, stocks, bonds, commodities, and cash can all comprise ETFs. An example is the SPDR S&P 500 ETF ($SPY), which tracks the S&P 500 Index. 

Day Trading ETFs List

Two Components of an ETF

Even though an ETF looks slightly like an index mutual fund, it is quite different. At their core, ETFs have two types of shares: Creation units and retail shares.

1. Creation Units

Authorized participants such as trading and brokerage firms hold creation units and agree to commit cash to the fund. These “authorized participants” or creation unit holders can exchange their shares for the actual securities held in the fund. Alternatively, they can add the appropriate securities to the fund to make new creation units. The purpose of this is to keep the value of the ETF in line with the underlying market index. 

If you’re curious, this is how they do it. When the price of an ETF drops below the value of the different securities, the “authorized participants” will trade in their creation units for the securities. Second, they then sell the securities in the open market.

Alternatively, if the price of the ETF goes above the value of the securities in it, the “authorized participants” will buy more securities. Next, they exchange them for more creation units to sell at a profit.

2. Retail Shares

Provided that only authorized participants can trade creation units, retail shares are what’s left for us. Retail ETF shares are listed on the Exchange to be bought and sold by regular traders/investors like you and me. 

More often than not, the price of both the creation units and the retail shares will correspond with the cost of the securities. On occasion, though, we see the value of the ETF and its investments going in different directions.

Can I Buy and Sell ETF on Same Day?

You can day buy and sell an ETF on the same day. It would be considered a day trade or intraday trade. If you’ve ever traded an individual stock, buying and selling an ETF will feel familiar because they’re traded the same way. Once again, you’ll need a trading platform and a brokerage firm to trade them. And in case you didn’t know, ETFs trade on the NYSE and NASDAQ.

Advantages of Day Trading ETFs

Flexibility. ETFs have a leg up over the competition in that you can buy or sell them any time you want during the trading day, long or short, using cash or margin, all through your regular brokerage account. This flexibility is great for day traders.

Versatility. I especially like that ETF offers a fantastic way for day traders to get exposure to market segments that may otherwise be difficult to trade. Not only are ETFs versatile financial instruments, but they are also suitable for every trading style – day or swing trading. 

Selection. Your options are unlimited, given that ETFs are available on the big market indexes, not to mention domestic bond indexes, international stock indexes, foreign currencies, and commodities. 

Customized. Sometimes, traders are interested in a market segment that doesn’t have an index on it. What ends up happening is that some companies develop their niche indexes. And, in turn, issue ETFs on them. You can find ETFs for green energy and Islamic investing markets.

Affordable. I like that ETFs provide a cheaper alternative to get exposure to a sector you might otherwise not have access to. Say, for example, that I want to invest in gold. Luckily, I have many options. I am buying gold bullion bars and coins or trading in gold futures contracts. But I don’t have the money. Sigh. What am I to do? Well, my cheapest option is to buy shares of $GLD. $GLD is a gold ETF that follows the market price of gold. What’s nice about $GLD is that it costs me a fraction of the amount of buying bars.

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More Bang for Your Buck

If you think the entire stock market will increase, you can buy a stock index like Dow Jones. For those unfamiliar with the Dow Jones Index, 30 companies make it up. You have three options available.

First, you can buy all 30 companies that comprise the Index. Second, you can buy DJIA futures contracts, which can be expensive. Third, you can buy shares of an ETF that follows Dow Jones, like the DIA ETF, at a fraction of the price. 

Tips on Day Trading ETFs

Trade The SPY ETF. The most trusted ETF is the SPY ETF. It ranks for the largest AUM, has the most substantial trading volume, and tracks the performance of the most popular stock index in the world, the S&P 500.

Only Enter Trades After 10:00 AM EST. Even though some traders like to catch a run out of the gates, I like to let the dust settle. It’s vital to wait and see what the smart money is doing; don’t get caught in a false breakout. 

Day Trading ETFs Orders

If you place a market order, you tell your broker to buy or sell the stock for you immediately at any price. Yes, at any price.

Aside from being hasty, if you place a market order, you have no control over the fill price. You get filled on the wrong side of the bid-ask spread. A market order buys at the ask (high side) and sells at the bid (low side). 

Unlike a market order, a limit order only fills at the price you want or better. The keyword here is limit; a limit order limits the price you will pay for the stock.

You tell your broker to buy or sell a specific stock at or better than a specified price. The important thing is that you are in control. 

Read our post on limit order vs market order.

Day Trading ETFs QQQ

This is a daily chart of the $QQQ, one of the most popular ETFs to day trade.

There is no doubt there is money to be made day trading ETFs, but you need to know how to do it right. Day trading ETFs provide simple trading opportunities with a lower operating cost than most other financial vehicles.

Frequently Asked Questions

  • $QQQ – Extremely popular tech ETF. As we all know, tech leads bull markets higher
  • $SPY – Good ol’ faithful SPY is always extremely liquid and has no issues with order fills
  • $VXX – This ETF is inverse tech. I trade it long when tech goes down and as a hedge
  • $SLV – Silver ETF when silver is in a bull market. Very popular
  • XLF – Top financial ETF full of all the top banks. Good to-day trade, long or short

Day trading an ETF has the same restrictions as buying and selling a security. It counts as a day trade.

    • Open an account with a major broker like TD Ameritrade or ETrade
    • Fund your account Either personal or IRA
    • You can trade either short-term or long-term
    • Make sure to learn support and resistance
    • Some popular ETFs: SPDR S&P 500 (SPY)
    • Gold Miners ETF (GDX)
    • ProShares VIX Short-Term Futures ETF
    • ProShares Ultra VIX Short-Term Futures ETF (UVXY)
    • iShares MSCI Emerging Markets ETF (EEM)

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