The spark of the COVID-19 pandemic had triggered massive volatility on the stock markets, resulting in a +30% selloff in March 2020. When such a violent move occurs, how market participants allocate capital shifts towards a conservative stance, as fear of things getting worse intensifies.
Are ETF CFDs appropriate?
Exchange-traded funds (ETFs) had been picking up steam since the 2008 financial crisis and now represent one of the most popular tools among stock market investors. That happens because of the ability to buy a single asset which provides exposure to a basket of different securities. By doing so, investors spread the risk and are not vulnerable when a single stock starts to underperform.
CFDs based on ETFs allow retail traders to trade instruments that track the exact performance of ETFs and come with a series of advantages. Even though it’s not possible to own the underlying instruments, leveraged trading is available, allowing more people to invest without having a lot of money.
The main advantage of ETFs is that they’re more liquid instruments and can serve as a great way to find trading opportunities even during market uncertainty like we have today. If stocks can go up or down by 10-20% in a day, that rarely happens with ETFs, given we’re dealing with a basket of stocks. Using ETFs could be a good way to build an optimal CFD portfolio without having to trade a lot of different assets. It will lead to lower trading costs, among others since there’s no need to pay a commission for each stock.
Picking the right names
Although ETFs are liquid instruments and can provide diversification, it does not mean that all of them are created equal. In 2020 we have ETFs for gold stocks, mining stocks, industrials, consumer staples, utility stocks, and many others, which requires traders to conduct an in-depth fundamental analysis. That should help figure out what ETF CFDs have great prospects over the near term. At the same time, given that short selling is possible, weakness in ETFs can be exploited as well.
Breakout trading, counter-trend trading, or any other technical strategy can be used in tandem with the fundamental analysis to spot accurate trading opportunities on a day-to-day basis. SPY, QQQ, and XLF are just some of the ETFs that are now trending, and that have generated plenty of opportunities since the COVID-19 pandemic had started to influence the stock market performance.