Trading ETF vs Stocks: Build Up Your Wealth With AI

motek 1This ETF trading article was written by Chloe Peng, Analyst at I Know First. Master of Science of Finance candidate at Brandeis University.


  • ETFs are an increasingly popular product for investors that capture broad indices or sectors in a single security.
  • ETF exists for various asset classes and can be traded using multiple strategies.
  • I Know First’s algorithmic prediction on ETFs can assist in better decision making.
Source: Bigstock

Have you ever seen ‘ETF’ in your banking Apps and wondered what an ETF is? In this article, I will explain to you what is ETF, what are its trading strategies and how our forecasts can help you make better decisions.

What Is An ETF?

An ETF, or exchange traded fund, is a type of mutual fund that’s traded openly on stock market exchanges. It has been increasingly popular with investors over the years. According to Statista, there are almost 7000 ETFs in the world as of year 2019.

(Source: Statista)

There are many types of ETF, such as index ETFs, commodity ETFs, inverse ETFs, actively managed ETFs, industry ETFs and foreign ETFs. See the chart below of their definition.

(Source: Visual Capitalist)

One of the most commonly seen ETFs is Index ETF, which involves a collection of securities that often tracks an underlying index, for example SP500. There’s also a type of mutual fund, index fund, that can be similar with ETFs in many ways, but there are many differences between them.

ETFs have many advantages over traditional mutual funds. First of all, they are nimbly traded like stocks on stock exchanged and can be easily bought or sold. Next, you can use limit orders to choose your buy or sell price and trades are settled at the price of the transaction. Besides, dividends can be automatically reinvested and ETFs have a much lower expense ratio than managed funds.

However, ETFs do have drawbacks. There can be wide spread in thinly traded ETFs. Smaller ETFs can experience the same thing as small stocks, where infrequently traded equities can have a larger spread between the bid and ask price, resulting in an invisible tax on earnings when it’s time to trade. Moreover, some ETFs are levered up to increase earnings. Investors not familiar with the issue may be surprised by the compounded loss during market downturns.

How Can You Make The Best Use Of ETFs?

ETFs are ideal for beginners because of their many benefits described above. They are also perfect vehicles for various trading and investment strategies. In this section, I will give you several examples on ETF trading strategies.

Dollar-Cost Average

Dollar-cost averaging is the technique of buying a certain fixed-dollar amount of an asset on a regular basis. This strategy is suitable for beginners who have little savings but a stable income. This encourages people to save money monthly but instead of putting the money into a low-interest saving account, investing in ETFs gives a potentially higher return.

For example, if you invest $500 on the first day of each month from September 2012 to August 2015 in the SPDR S&P 500 ETF (SPY), an ETF that tracks the S&P 500 index. Thus, when the SPY units were trading at $136.16 in September 2012, $500 would have fetched you 3.67 units, but three years later, when the units were trading close to $200, a monthly investment of $500 would have given you 2.53 units.

(Source: Trading View)

Over the three-year period, you would have purchased a total of 103.79 SPY units (based on closing prices adjusted for dividends and splits). At the closing price of $209.42 on Aug. 10, 2015, these units would have been worth $21,735.170, for an average annual return of almost 13%.

By utilizing this strategy and investing in ETFs, not only have you saved much money, you have also achieved a satisfying return over the period with small initial investments.

Sector rotation

ETFs make it relatively easy to execute sector rotation based on various stages of economic cycle or specific events. For example, during the coronavirus times, technology, online retailing and online streaming companies outperform others largely. You may lean your ETF portfolio according to industry performance during a specific period of time based on your judgements.

Short Selling

Short selling through ETFs is preferable to shorting individual stocks because of significantly lower borrowing costs. ETFs’ diversified nature also better control the risk of short selling. Moreover, ETFs are less vulnerable to the scenario of short squeeze, where a heavily shorted security or commodity can spike higher.

Besides, inverse ETFs are designed to profit from a decline in the value of a benchmark. Investors can purchase inverse ETFs to make money from a market downturn or a decline in the underlying index without selling anything short.

AI-Driven Predictive Algorithm Will Assist You In ETF Trading

Dollar cost average, sector rotation and short selling are all good strategies to trade on ETFs. But the simple principle on profiting is still ‘buy low and sell high’. As investors, we oftentimes do not have a deep insight into the market. It’s hard for us to process massive amount of market data and events. We can be shocked by big events, such as the coronavirus outbreak, so that we won’t be rational enough to analyze the situation and make decisions. Or we could simply be too busy to study market trends on our own.

Luckily, I Know First’s trading algorithm can be helpful in ETF trading. The ETF package is one of our quantitative investment solutions that determines the top ETFs by screening our database using artificial intelligence. We have ETF forecast on Chinese ETFs, European ETFs and other. The algorithm is able to analyze huge amount of market data and generate useful information. Besides, it learns from previous forecasts and continuously adjusts itself to changing market situations.

The algorithm generates daily forecast on 6 time-horizons, ranging from 3 days to 1 year. The predictions will be delivered through user-friendly heat maps where you can find signals and predictabilities for each asset. For example, in the graph below, the heat map presents that on Aug 2, 2019, the algorithm gave a bullish forecast on the 10 ETFs. After 1 year, 9 out of 10 ETFs moved in accordance with the forecast. TQQQ has the most notable return of 91.45% in the period. The average return on the package is 25.98%.

Here at I Know First, our AI-based algorithm has modeled and predicted assets price movement worldwide for short-term and long-term time horizons, ranging from 3 days to a year. Since 2011, we have been providing daily stock market forecast, gold prediction, Forex forecast, oil prices forecast, and, in particular, top tech stocks. Today, we are producing daily forecasts for over 10,500 assets. These forecasts generated by our quant trading tool are used by institutional clients, as well as private investors and traders to identify the best investment opportunities in the market.

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Please note-for trading decisions use the most recent forecast.