How to trade and invest in ETFs

1. Learn what ETFs are and how they work
2. Find out the risks and benefits of trading ETFs
3. Open a tastytrade trading account
4. Develop a trading strategy
5. Research and compare ETFs
6. Open your first ETF position
7. Monitor and manage your ETF portfolio

Learning how to buy or sell exchange-traded funds (ETFs) can be a starting point for many traders and investors. ETFs gain exposure to many different stocks within a sector, offering broad sector exposure as opposed to exposure to just one stock. This can naturally reduce the volatility of the ETF relative to a single stock within the basket, simply because one stock is just one slice of the pie.

Passive ETFs are straightforward and tend to track an index, such as the S&P 500 or NASDAQ. Active ETFs are managed, and holdings can change frequently. Some ETFs offer dividends, while others do not. Some ETFs are concentrated with a few holdings, while others are more balanced with low exposure for each ETF component. It is imperative to understand the fund you are trading or investing before diving in, as there are many differentiating factors in the ETF world.

Learn more about ETFs

Diversified ETF Benefits

When you learn about the potential benefits of trading ETFs, you likely hear about the lower volatility these products typically have relative to single-name stocks. Since these funds have spread out exposure to several different stocks, it can reduce the volatility risk of a CEO stepping down or a bad earnings announcement. Regardless of whether a surprise move in a stock is to the upside or downside, the rest of the products within the ETF tend to reduce the overall effect of the fund. Additionally, diversified ETFs further remove traders and investors from “stock picking” and the need to be right. Instead of picking a particular stock in a sector that a trader may think will go up or down, traders and investors can select a sector ETF with broad exposure to get general exposure to the entire sector.

Concentrated ETF Risks

There are ETFs that are very concentrated to just a few stocks. In other words, a handful of stocks may make up half of the fund’s exposure—or more. In this case, these single-stock binary events can make much more of an impact on the overall ETF performance. This is why it’s important to understand the ETF’s holdings before trading or investing in a fund. This way you have an idea of what is within the fund itself, but also understand how the products are weighted. Generally, trading ETFs can be less volatile than trading single-name stocks. ETFs offer broad-based exposure to many different sectors and regions, both domestic and international. It’s important to dig into the ETF you’re trading or investing in to understand the ETF exposure and the weighting of each product within the ETF.

Trading and investing in ETFs with tastytrade is commission-free, regardless of how many shares are traded.

When trading options on available ETFs, commissions are $1 to open and $0 to close, with a $10 cap on large-quantity orders.

Find out more about pricing and fees

Now that you understand how ETFs work, and the potential benefits and risks associated with them, it is time to find an ETF that fits your trade assumption.

1. Research the ETFs of the markets/sectors/industries/regions you want to gain exposure to.
2. Compare ETFs within your chosen sector.
3. Analyze the makeup of the ETF to get an idea of product exposure and weightings.
4. Find all relevant material and do your research.
5. Develop a trading plan for entering and exiting ETF trades and investments.

1. Sign in to the tastytrade web, desktop, or mobile platform and search for the ETF ticker you want to trade.
2. Click on the ask (buy) price if you want to own the ETF, or click on the bid (sell) price if you want to sell or short the ETF.
3. Select your trade price and the share quantity.
4. Click “Review and Send” when you’re ready to review the details of the trade.
5. Review the details of the trade including commissions and fees, and click “send order” to route the order.

When investing in an ETF, it’s important to regularly check the position to see if adjustments need to be made. Every so often, ETFs are rebalanced where product weightings or products themselves may change. Keep an eye on ETF updates by regularly checking the position, and any news related to the ETF.

For ETF options traders, keeping an eye on upcoming earnings announcements that may affect the fund is crucial. This is especially important for top-heavy ETFs, meaning a few products make up a large weighting of the total fund.

BUYING AND SELLING AN ETF OPTION EXAMPLE

To trade an ETF option, first log into the tastytrade platform. Then, follow the below steps:

1. Click on a ticker symbol from a watchlist, or manually type one in where you see SPY at the top of the platform in the image below.
2. Click on the table trade view so you can see the options chain. This is where available options expirations are listed, and you can click into an expiration to see the call and put options
3. To buy or sell an ETF option, click on the Bid (Sell) or Ask (Buy) next to the strike price of the call or put you want to trade. When you click on one of the prices, your ETF options trade will populate on the trade page. This example shows buying a 580-strike call option in SPY.
4. Along the bottom of the trade page, you adjust the quantity of options contracts, the purchase price, order type, and time-in-force (TIF) which is how long an order stays active before it expires. You can also move the strike up or down, adjust the expiration, and much more using this toolbar.
5. Click the "Review & Send" button to review the trade details. On the final page, review all aspects of the order including commissions and fees, then send the order.