ETF Trading Strategies for New & Professional Investors You Want to Know

As an investor, you’re always looking for new ways to maximize your returns while minimizing risk. Exchange-traded funds (ETFs) offer an attractive way to achieve both goals. ETFs provide instant diversification and flexibility, allowing you to invest in entire sectors or indexes with a single trade. For new and professional investors alike, ETFs should be a part of any well-balanced portfolio.

In this article, we will explore the best ETF trading strategies to consider as you look to improve your investment outcomes. From core and complementary strategies to sector rotation and short selling, ETFs provide a dynamic set of tools to manage your portfolio exposure actively.

Whether you’re just getting started with ETFs or have years of experience, the strategies discussed here can help take your investing to the next level.

Keep reading to determine how you can best take advantage of ETFs and which techniques match your own risk tolerance and financial goals.

The opportunities for success are many if you have the right plan and discipline.


What Are ETFs and How Do They Work?

Exchange-traded funds, or ETFs, are baskets of securities that trade on exchanges just like stocks. ETFs can contain stocks, commodities, or other assets. Unlike mutual funds, ETFs trade throughout the day on exchanges, so you can buy and sell them whenever the market is open. For Muslims, it is important to know whether an ETFs is halal or not. How can you find out?

Read On!

ETFs provide several benefits for investors:

  1. Low costs. ETFs typically have lower fees than mutual funds because most are passively managed. The average ETF has an expense ratio of 0.44%, compared to 0.74% for the average stock mutual fund.
  2. Tax efficiency. ETFs’ in-kind creation and redemption processes result in fewer capital gain distributions. This can save investors money on taxes.
  3. Diversification. ETFs provide an easy way to diversify your portfolio. Some ETFs track broad indexes, specific sectors, industries, and even strategies like dividend growth or low volatility.
  4. Liquidity. ETFs are very liquid since they trade on exchanges. You can buy and sell them whenever the market is open, and ETFs are very tax-efficient because of the creation and redemption process.
  5. Transparency. ETFs disclose their holdings daily, so investors know what securities and weights are in the fund. Mutual funds only disclose holdings quarterly.

ETFs provide an accessible way for all investors to achieve their financial goals.

Are ETFs Halal?

Whether an ETF (Exchange-Traded Fund) is Halal largely depends on its components. To ensure Shariah compliance, investors can look for ETFs certified by Islamic scholars. Some ETFs are naturally Shariah-compliant and meet Islamic law requirements.

For other ETFs, individual research is crucial. Investors should carefully examine each asset in the fund to determine if it aligns with Shariah principles. In cases where an ETF includes a small proportion of non-Shariah-compliant companies, it can still be considered Halal, given that the core business activity of all companies remains Shariah-compliant. This depends on the investor performing ‘purification’ by donating the earnings derived from these non-compliant companies to charity.

Furthermore, tools like the Musaffa screener can aid in identifying which ETFs are Halal and which are not, simplifying the process for investors adhering to Islamic finance guidelines.

Read: How to Screen Halal Stocks Using Musaffa App

Understanding Halal Exchange-Traded Funds (ETFs): Criteria and Compliance Top of Form

Halal Exchange-Traded Funds (ETFs) are designed to comply with Islamic law (Shariah law), catering to Muslim investors and those interested in ethical investing. Unlike mutual funds, ETFs trade like stocks, offering real-time pricing, lower fees, and flexibility. Halal ETFs are subject to a rigorous screening process based on specific criteria to ensure Shariah compliance.

  • Business Activity: Halal ETFs are restricted from investing in companies involved in non-Halal activities or industries. Companies in sectors like gambling, interest (riba), alcohol, pork, tobacco, cannabis (unless Shariah-approved for medicinal use), and adult entertainment are excluded. An ETF is considered Shariah-compliant if less than 5% of its total revenue comes from non-compliant activities, provided that none of the companies included in the ETF engages in those activities as their core business.
  • Interest-bearing Securities and Assets: In line with Islamic finance principles that prohibit earning from interest, Halal ETFs avoid companies with significant interest-bearing securities or assets. The threshold is set such that these securities and assets should not exceed 30% of the ETF’s 36-month average market capitalization.
  • Interest-bearing Debt: Islamic finance also forbids interest-based debt (Riba). Therefore, companies in Halal ETFs must have interest-bearing debt lower than 30% of their total market capitalization.

These parameters ensure that Halal ETFs adhere to Islamic principles, making them suitable for investors seeking options that align with their religious beliefs and ethical standards. Only ETFs meeting these strict conditions are considered Halal or Shariah-compliant.

Related: 7 Best Halal Investment Ideas for 2023

Benefits of ETF Trading for Investors

As an investor, exchange-traded funds (ETFs) offer several advantages over individual stocks or mutual funds. ETFs provide low-cost, tax-efficient access to a wide range of investment strategies, asset classes, and sectors.

ETFs typically have lower fees than mutual funds since they are not actively managed. Most ETFs track an index, so they do not require fund managers and analysts to select securities. This passive management approach results in lower management fees and operating expenses. The lower costs allow investors to keep more of their returns.

ETFs also provide tax efficiency. Unlike mutual funds, ETFs do not trigger capital gains distributions. This means investors are not taxed on embedded capital gains resulting from other investors trading the fund. Taxes are only applied when the investor sells shares.

ETFs offer exposure to a diverse range of investments. There are ETFs covering major indices, commodities, real estate, international stocks, emerging markets, and more. ETFs enable investors to easily diversify their portfolios and access asset classes that would otherwise be difficult to invest in.

Trading flexibility is another benefit of ETFs. Shares can be bought and sold throughout the day on exchanges at market prices. This is unlike mutual funds, which are priced once per day after the market closes. The ability to trade ETFs intraday provides more control and opportunities for investors.

6 Top ETF Trading Strategies to Know

Once you have a firm understanding of ETFs and how they work, it’s time to develop an effective trading strategy. Several proven strategies can help you achieve your investment goals, whether you’re a new or seasoned investor.

1- Buy and Hold

This long-term strategy involves purchasing ETFs and holding them for an extended period, such as 10-20 years or more. The main goal is to maximize returns over time through compounding. Some recommendations for this approach are:

  • Focus on low-cost, diversified ETFs that track major indexes like the S&P 500. These provide broad market exposure and historically generate average annual returns of 7% after inflation.
  • Rebalance your portfolio annually or semi-annually to maintain your target allocations. This may involve buying and selling ETFs to rebalance.
  • Do not react to short-term market fluctuations. Stay invested for the long run to achieve your financial goals.

2- Sector Rotation

For potentially higher returns, shift between sectors and industries based on economic cycles and market trends. Invest in sectors primed for growth, like technology or healthcare, then shift into more defensive sectors, like utilities, when the economy slows. It requires monitoring the markets closely but can produce significant gains if timed properly.

3- Arbitrage

It involves simultaneously buying and selling ETFs or their underlying securities to take advantage of minor price differences. Low risk but also low potential profits. It requires fast, frequent trading and access to real-time data to identify arbitrage opportunities. It works best for institutional investors and high-frequency trading firms with specialized software.

The strategies you choose will depend on your investment objectives, risk tolerance, and experience level as an ETF trader. Start with simpler buy-and-hold or sector rotation strategies, then progress to more advanced techniques as you gain knowledge and confidence.

Passive ETF Investment Strategies

As an investor, passive strategies allow you to take a hands-off approach to buying and holding ETFs. These methods do not require frequent trading or timing the market. Passive strategies for ETF investing include:

4- Indexing

This passive strategy aims to match the performance of a market index like the S&P 500. You purchase ETFs that track the same indexes. Some guidelines include:

  • Select low-cost ETFs with minimal tracking errors that closely follow the index. Higher fees and tracking errors reduce returns over time.
  • Maintain a balanced, diversified portfolio that reflects the diversity of companies and sectors in the overall market.
  • This approach provides broad market exposure and historically generates average returns. While returns may be slightly lower than an active approach during bull markets, indexing also typically sees lower losses during downturns.

Active ETF Trading Strategies

As an active ETF trader, several strategic approaches can help maximize your returns. These advanced techniques require close monitoring of the markets and your positions. However, the potential rewards of higher gains and outperformance make the additional effort worthwhile for many active traders.

5- Day Trading

For the most active traders, day trading ETFs involve entering and exiting positions within the same trading day, trying to take advantage of short-term price fluctuations and trends. This high-frequency trading requires close attention to technical indicators and charts to spot opportunities. While risky, successful day trading can result in substantial profits.

Related: What You Need to Know About Day Trading in Islam

6- Swing Trading

For those with a slightly longer-term horizon, swing trading aims to capture gains from price swings over a period of several days to weeks. Swing traders rely on technical analysis to find ETFs with upward price momentum and volatility. By entering during an upswing and exiting near the top, swing traders can benefit from the majority of a price move. This approach requires diligently monitoring positions and market movements daily.

Related: What Muslims Should Know About Swing Trading

For Muslims: Investing Strategies for Muslims in 2023

Using ETFs for Diversification


One of the keys to reducing risk is diversification. By investing in ETFs that track different market sectors, indices, commodities, and asset classes, you can achieve broad market exposure and balance out the volatility in your portfolio.

For new investors, a simple two- or three-fund portfolio is a good place to start. You could combine an S&P 500 Shariah ETF, a total international stock market ETF, and a utility ETF.

More experienced investors may want to add ETFs focused on:

  • Specific sectors like technology or healthcare. This allows you to overweight sectors you believe will outperform the overall market. However, sector ETFs also generally carry more risk.
  • Small-cap or mid-cap stocks. While large companies dominate major indices like the S&P 500, smaller companies have the potential for higher growth. Adding a small-cap ETF provides greater diversification across company sizes.
  • Emerging markets. Consider an emerging markets ETF and a broad international ETF for international exposure. Emerging market ETFs provide access to higher-growth economies like China and India but also have more volatility.
  • Real estate or commodities. ETFs that invest in real estate, gold, or other commodities can provide diversification beyond traditional stocks and bonds. However, they tend to be more volatile and risky.

Using ETFs to build a diversified portfolio is a simple yet effective way to invest in the long run. Start with a basic two- or three-fund approach, and as your knowledge grows, expand into other areas to find the right balance of risk and return for your needs.

Implementing an ETF Rotation Strategy

An ETF rotation strategy involves moving your money between different ETFs based on the current market cycle. As certain sectors heat up, you shift to leading ETFs to capture gains. Then, move out again before the cycle changes. It requires active management but can boost returns if timed properly.

To implement an ETF rotation strategy:

  1. Determine the market cycle. Analyze economic indicators like growth, inflation, and interest rates to assess if you’re in an expansion, peak, contraction, or trough cycle. For example, higher growth and inflation point to an expansion, while lower growth and deflation indicate a trough.
  2. Choose the leading ETF sectors. In an expansion, focus on growth sectors like technology and healthcare. In a peak, shift to defensive sectors such as utilities, real estate, and consumer staples.
  3. Select 3–5 top ETFs in the leading sectors. Analyze 1-year and YTD returns, holdings, and market capitalization to find the strongest ETFs. For example, choose ETFs focused on software, biotech, or digital payments in an expansion. Pick ETFs focused on real estate, utilities, or telecom in a peak.
  4. Rotate your portfolio. Sell other underperforming or defensive ETFs and allocate more to your selected leading ETFs. Aim for a 70-90% allocation to the new ETFs. Monitor the market cycle and leading sectors to know when to rotate again.
  5. Rebalance periodically. Every 3-6 months, revisit your selected ETFs and allocations to make sure they still match the current market environment. Trim or add to positions as needed to maintain your target allocations.

An ETF rotation strategy takes practice but can boost your returns by capitalizing on the market’s ups and downs. Stay agile, do your research, and move into the leading ETFs for each new cycle. With time, you’ll become an expert at identifying the early signs it’s time to shift your portfolio into a different phase..

Tips for Choosing the Right ETFs

When choosing ETFs to invest in, several tips can help ensure you select options well-suited to your needs and risk tolerance.

Define Your Goals

First, determine your investment goals. Are you seeking growth, income, or asset protection? The types of ETFs you choose will depend on whether your goal is capital appreciation, generating yield, or hedging risks.

Consider the Index and Holdings

Evaluate what index or sector the ETF tracks and its underlying holdings. An ETF that follows the S&P 500 index will have very different holdings than one focused on emerging markets or healthcare stocks. Make sure the ETF’s investments align with your financial objectives and risk tolerance. Check the fund’s prospectus to review its holdings in detail.

Analyze Costs and Fees

Compare the ETF’s expense ratio to similar funds to ensure fees are reasonable. Lower fees mean more of your money remains invested. However, slightly higher fees for an actively managed ETF may be justified if the fund outperforms passive ETFs. Also, consider potential brokerage commissions and bid-ask spreads for each trade. Minimize fees when possible, but don’t make choices solely based on cost.

Review Historical Performance and Ratings

Evaluate the ETF’s long-term returns and performance relative to the overall market and peer funds. While past results are not predictive of future performance, significant underperformance could signal potential issues. Check independent analyst reviews and ratings, which can identify well-managed ETFs with solid fundamentals.

Choose an Appropriate Allocation

Determine what percentage of your portfolio to allocate to each ETF based on your goals and risk tolerance. A good rule of thumb is to invest no more than 5-10% of your portfolio in any single fund. This limits risk while allowing funds to meaningfully impact overall returns. Rebalance periodically to maintain target allocations.

Following these tips will help you construct an ETF portfolio tailored to your needs. Do your due diligence, start with a solid plan, and select funds for the right reasons. Stay diversified, keep fees low, and rebalance as needed. With the right ETFs, you’ll be on your way to achieving your investment objectives.

ETF Trading FAQs: Your Top Questions Answered

As an ETF investor, you likely have many questions about how to research, buy, and sell ETFs. Here are answers to some of the most frequently asked questions about ETF trading:

What are the costs associated with ETF trading?

ETF trading involves similar costs to stock trading, including brokerage commissions and bid-ask spreads. Brokerage commissions are charged by your broker when you buy or sell shares. Bid-ask spreads refer to the difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept. These costs can vary depending on your broker and the specific ETF. Some brokers offer commission-free ETF trading or lower costs for high-volume traders.

How do I determine an ETF’s net asset value (NAV)?

An ETF’s NAV is calculated at the end of each trading day based on the market prices of the fund’s underlying securities. You can find an ETF’s NAV on the fund provider’s website or through your broker. The NAV reflects the per-share value of the ETF’s portfolio holdings. ETF share prices are determined by the free-market forces of supply and demand and may be traded at a premium or discount to the NAV.

What is a limit order? How is it used for ETF trading?

A limit order is an instruction to your broker to buy or sell shares only if the ETF reaches a specific target price. Using limit orders for ETF trading allows you to control the price at which your trade is executed. For example, if you place a buy limit order for $50, your order will only be filled if the ETF’s market price falls to $50 or lower. Limit orders provide price control, but there is a chance your order may not be executed if the price target is not met.

Final thoughts

As you can see, there are many effective ETF trading strategies for both new and professional investors to consider. Whether you prefer a more passive buy-and-hold approach or an active style, the key is to find strategies that align with your financial goals and risk tolerance. The options are vast, but with some research, you can build a balanced ETF portfolio to achieve strong returns over the long run.

While ETFs have made investing more accessible, always remember to do your due diligence. Keep learning and stay up-to-date with trends to make the most of these innovative financial tools. With the right strategies and persistence, you can succeed as an ETF investor.

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