The Top 7 ETFs for Day Trading

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The Top 7 ETFs for Day Trading

Day traders try to earn money by initiating and closing trading positions many times during the day. They typically close all open positions at the end of the day and do not carry them over to the next day.

Aside from equities, exchange-traded funds (ETFs) have developed as a popular product for day trading. They provide mutual fund diversification, stock liquidity and real-time trading, and cheap transaction fees. Depending on the qualifying requirements and financial restrictions, a few ETFs may also qualify for tax advantages.

This article examines the top ETFs that are ideal for day trading, using data as of May 24, 2021.

Key Takeaways

  • The purpose of day trading is to earn money by initiating and closing trades many times throughout the trading day.
  • The majority of day traders close all of their positions at the end of the day and do not carry any through to the next day.
  • Day traders buy in equities, but they also employ exchange-traded funds (ETFs).
  • Day traders should look for ETFs with strong liquidity, minimal transaction costs, and narrow bid-ask spreads.
  • Day traders could choose ETFs that follow the S&P 500 Index, the Dow Jones Broad Market Index, and Treasuries.

Criteria for Selection

Day trading is swiftly purchasing and selling positions in order to generate tiny gains by trading high volumes from several deals. ETFs appropriate for day trading should have high levels of liquidity, allowing for quick transaction execution at fair pricing.

ETF trading should have low transaction costs since frequent trading results in high transaction costs that cut into available profit potential. In addition, the bid-ask spread on price quotations should be considered. The bid-ask spread is the difference between the purchase and sell prices sought by market players trading a certain asset. A narrower bid-ask spread suggests more accurate price discovery and more liquidity.

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Most ETFs that meet these three characteristics are based on larger markets (for example, those based on prominent indexes such as the S&P 500 Index or on broader markets generally).

Specialized theme-based ETFs, such as gold or oil-based ETFs, may also provide high liquidity to day traders. However, such ETFs may be prohibitively expensive in terms of transaction costs, making them unsuitable for day trading.

Similarly, others, such as leveraged ETFs, may provide substantial exposure (two or three times the underlying), although they often lack liquidity and may have high cost ratios. Such ETFs may not meet the day trading requirements and will not be considered for inclusion in the day trading list.

The Top ETFs for Day Trading

1.Vanguard S&P 500 ETF (VOO): VOO monitors the popular S&P 500 Index, which reflects the top 500 firms in the United States from a variety of industries. This ETF invests in companies in the S&P 500 Index in proportion to the index. It has successfully replicated the index’s performance with little tracking error. VOO has one of the lowest cost ratios of just 0.03%, making it a favorite among day traders, with an average daily traded volume of 4.6 million shares.

2.iShares Core S&P 500 ETF (IVV) and SPDR S&P 500 ETFTrust (SPY): IVV and SPY operate in the same manner as the previously described VOO ETF. The sole difference is that SPY has a 0.09% higher expenditure ratio. The expenditure ratio for IVV is the same as that of VOO: 0.03%. Furthermore, with an average daily trading volume of 88.6 million shares, SPY provides substantially greater levels of liquidity.

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3.Vanguard Total Stock Market ETF (VTI): VTI tries to monitor and replicate the performance of the CRSP U.S. Total Market Index. This index comprises large-cap, mid-cap, small-cap, and micro-cap equities traded on the NYSE and NASDAQ. This ETF enables a trader to gamble on a greater overall market, spanning a broader range of equities across numerous market capitalization and industries. VTI is a fantastic alternative for day traders, with a 0.03% cost ratio and an average daily trading volume of 4.3 million shares.

4.Schwab U.S. Broad Market ETF (SCHB): Another broad-market ETF that follows the Dow Jones U.S. Broad Stock Market Index. The index contains the top 2,500 publicly listed firms in the United States. This ETF has a daily trading volume of around 500,000 shares and a low cost ratio of 0.03%.

5.iShares Treasury Floating Rate Bond ETF (TFLO): For day traders looking for a bond ETF, TFLO is an excellent and cost-effective solution. The performance of the Barclays U.S. Treasury Floating Rate Index is attempted to be replicated by this fund. This ETF was effective in precisely reproducing the performance of the benchmark index with a very low tracking error. It has a 0.15% expenditure ratio but provides a fee waiver of the same amount, resulting in a $0 effective expense ratio.

6.iShares 20+ Year Treasury Bond ETF (TLT): TLT is another bond-based ETF that tracks the performance of the ICE U.S. Treasury 20+ Year Index to give exposure to long-term U.S. Treasury securities. It has considerable liquidity, with an average of 16 million ETF shares changing hands daily. It has exactly paralleled the performance of the benchmark index. It does, however, have a higher expenditure ratio of 0.15%.

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7.Schwab U.S. TIPS ETF (SCHP): Concerned about inflation? Want to profit from investing on inflation-protected securities? SCHP is a fantastic match. It follows the performance of the Bloomberg Barclays U.S. Treasury Inflation-Linked Securities (Series-L) Bond Index, which is a market-value weighted index of U.S. Treasury inflation-protected securities with at least one year to maturity. With around 2.2 million shares moving daily on average and a 0.05% cost ratio, SCHP is an excellent choice for day traders.

The Bottom Line

Day trading is high risk since most day traders use margin-based leveraged positions. Margin-based leverage provides for more exposure with less trading capital.

As a result, it is vital to keep the related transaction costs low in order to account for the odd loss while maintaining realistic profitability. Choosing the correct ETFs based on the aforementioned factors may help a day trader make more money.

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