ETF Trading SPY: 16 Things You Should Know

Last Updated on November 24, 2022 by Quantified Trading

Do you want the convenience of stock trading and at the same time enjoy the diversification benefits of mutual funds? You should consider trading ETFs. ETFs combine the benefits of both types of investments, providing an easy and inexpensive way to build a diversified investment portfolio. Want to know about ETF trading SPY?

An exchange-traded fund (ETF) is a type of pooled investment fund, just like mutual funds, but they are traded on exchanges. You can buy and sell the units as you would a stock on the stock exchange. ETF trading (SPY) offers the convenience and low fees of stocks and the diversification benefits of mutual funds.

In this post, we take a look at ETF trading SPY. Almost all of the backtested and profitable trading strategies we provide on this blog are all tested on ETFs (SPY, QQQ, TLT, etc.). The reason for that is mostly based on simplicity – they are easier to backtest than futures. That said, we also trade futures ourselves and we find very few discrepancies between ETFs and futures in both backtest and live trading.

Let’s go on to look more in detail on ETFs:

1. What are ETFs?

ETFs (exchange-traded funds) are a type of pooled investment fund that is traded on exchanges, just like stocks. Exchange-traded funds allow you to invest in many securities at once, and their fees are typically lower than those of managed funds. 

Unlike mutual funds, exchange-traded funds can be bought and sold on a stock exchange in the same way that regular stocks can. An ETF can be structured to track anything, from the price of a single commodity to the prices of a large and diverse collection of securities. ETFs can even be built to mimic the performance of a specific investment strategy. The most common ETFs track the broad market index or sector indexes.

2. How do you trade ETFs?

ETF shares are traded in the same way that stocks are. In contrast to mutual funds, whose prices are determined after the market closes for the day, ETFs are priced and traded continuously throughout the trading day. They behave exactly like common stock in that they can be purchased on margin, sold short, or held for a long term. ETFs make it simple to begin investing and allow investors to buy many stocks or bonds at once.

3. How does an ETF work?

The provider of an ETF creates a fund designed to track the performance of certain assets and then sells shares of that fund to investors. The people who own shares in an exchange-traded fund (ETF) own a piece of the fund but not the assets that make up the fund. 

ETFs are structured to replicate the performance of a specific stock or bond market benchmark index, such as the S&P 500 index (SPY – the oldest ETF still trading), Russell 3000 index, and the Bloomberg US Aggregate Bond Index. Other exchange-traded funds (ETFs) track commodity prices by purchasing futures contracts or even physical commodities like gold (GLD). Exchange-traded fund (ETF) shares can be bought through a brokerage firm or an investing app in the same way that stocks can be bought.

4. How do ETFs make money? 

ETFs can generate income from their investments in underlying assets such as stocks and bonds. ETF investors can profit whenever the fund’s underlying assets, such as stocks or bonds, increase in value or distribute a portion of their profits to investors in the form of dividends or interests.

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When you purchase an exchange-traded fund (ETF), you purchase a piece of a collection of assets, and you can buy and sell your piece during market hours. ETFs can help you diversify your portfolio while potentially lowering your risk exposure.

5. What does ETF stand for?

An ETF is an abbreviation for an exchange-traded fund. The E stands for Exchange; the T stands for Traded; while the F stands for Fund.

6. Can you scalp ETFs?

Yes, you can scalp the SPY ETF, as you would any stock on the stock exchange. ETFs trade just like any stock. Trading an ETF that tracks the S&P 500 is similar to trading an S&P 500 e-mini — you analyze the price action and trade just like any other.

That said, we believe scalping is mostly a waste of time. Scalping is extremely difficult and very few succeed, mostly because stocks and ETFs are a zero-sum game. This applies to ETF trading SPY as well.

Why the stock market is a zero-sum game is better understood if you read our clickable link.

7. Can you day-trade ETFs?

Yes, you can day-trade SPY ETF (and other ETFs as well), as you can buy and sell them via your broker — the same way you can day trade a stock.

8. Where do ETFs trade?

ETFs are listed on a stock exchange and trade in a manner very similar to stocks. The SPY ETF enables investors to diversify their investments at a lower cost while gaining exposure to various asset classes, including equities.

9. How are ETFs taxed?

If you sell an ETF for more money than you paid for it, you may have to pay a capital gains tax on the profit. If you owned the ETF shares for less than a year, any profits you made from selling them are taxed at the same rate as your regular income (US investors and traders). If you have held the fund’s shares for more than a year, you will be subject to more favorable capital gains tax rates.

10. What are the risks of ETFs?

Some exchange-traded funds (ETFs) track highly specialized or even gimmicky segments of the stock market, making them more volatile than the overall market.

Also, leveraged exchange-traded funds (ETFs) that promise market returns that are higher or lower than the market are volatile, hard to understand, and risky for small investors.

Please keep in mind that the history of ETFs is rather short. Most of the growth has come after the great financial crisis in 2008/09. This means they are not really tested during financial stress. Howard Marks, the famous bond investor, has several times emphasized this fact.

 11. ETFs vs. Mutual Funds – What’s the Difference?

The main difference between exchange-traded funds (ETFs) and mutual funds is that ETFs, like stocks, can be bought and sold throughout the trading day. On the other hand, mutual funds can only be bought at the end of each trading day at a price based on the fund’s net asset value.

12. Can you swing trade ETF trading SPY?

Yes, you can swing trade ETFs because they trade like stocks. One interesting thing about some ETFs is that they have adequate liquidity and volatility that is neither too high nor too low. Unlike mutual funds, trading exchange-traded funds do not incur significant trading costs.

ETF trading SPY strategies

Since we started this blog in 2012, we have published plenty of free ETF trading SPY strategies in addition to the best ones which we charge money for.

You can find our ETF trading SPY strategies here:

13. What are the biggest ETFs?

Some of the biggest ETFs are the ones that track a broad market index, such as the S&P 500 index, Russell 3000 index, Nasdaq composite index, and so on. They are often ETFs with a proven track record of profitability. SPY, the ticker code for S&P 500, is the oldest ETF still trading. It started trading as early as 1993.

Among ETF providers, the most successful ETFs are the ones that have the most assets under management (AUM). Such ETFs usually have a high trading volume, which reduces the ask-bid spread.

Furthermore, a higher AUM indicates a higher quality fund that has been in operation for longer. The following are some of the most important ETFs in the US stock market:

SPDR S&P 500 ETF (SPY)

  • Issued by State Street Global Advisors
  • $373.3 billion in assets under management
  • 0.0945% expense ratio

This was the first S&P 500 index ETF, the first of its kind to be offered on the market. SPY is popular among both buy-and-hold investors and active traders.

The fund seeks to replicate the performance of the S&P 500 Index, which is a collection of stocks with large market capitalizations that are traded on U.S. stock exchanges. Because the SPDR 500 ETF is technically a unit investment trust (UIT), it is not permitted to reinvest cash dividends between asset distributions. As a result, the fund’s performance may deviate slightly from that of the index on which it is based.

The expense ratio is really low. By investing in SPY you are most likely going to outperform most active money managers.

Vanguard Total Stock Market ETF (VTI)

  • Issued by Vanguard
  • $271.6 billion in assets under management 
  • 0.03% expense ratio 

The VTI tracks the CRSP U.S. Total Stock Market Index, so the fund’s holdings are a reflection of the whole U.S. stock market. The fund is classified as a balanced fund because it invests in a diverse range of blue-chip, mid-cap, and small-cap stocks.

VTI is an extremely cost-effective fund with a low expense ratio (the lowest?). The AUM is also impressive, totaling more than 271 billion dollars. If you are unsure which index to follow or if you want to invest across a range of industries and market capitalizations, this fund may be a good fit.

The iShares Core MSCI EAFE ETF (IEFA)

  • iShares is the issuer 
  • $88 billion in assets under management
  • 0.07% expense ratio

IEFA’s portfolio includes developed-market stocks from Europe and Asia but no stocks from the United States or Canada. The company’s benchmark index, the MSCI EAFE, encompasses approximately 98% of all global equity markets outside North America.

Unlike most competitors, it does not exclude small-cap stocks from its portfolio but includes them in proportion to the market. The fund’s portfolio is primarily made up of assets from Japan and the United Kingdom.

The IEFA is an excellent option for short-term and long-term investors seeking exposure to markets outside North America because it is a well-diversified fund with low ownership costs. The fund holds nearly 3,000 stocks.

14. Which ETF is best?

For short-term traders, the best ETF is the one that makes them the most money. But that also depends on the trading strategy. So the only way to know is to backtest your strategy across many ETFs to know the one that works best for you.

Nonetheless, the SPDR S&P 500 (SPY), established in 1993, has been the longest-lasting ETF. It may be the best for a long-term investor who wants an S&P 500-diversified portfolio. Additionally, we believe the ETF SPY is the best one to trade for short-term gains.

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15. When did ETF trading SPY start?

The first exchange-traded fund (ETF) to be listed in the United States was in 1993, and it is now regarded as a landmark ETF (SPY). The number of ETFs has increased since then. It was about 102 in 2002 and nearly 1,000 by the end of 2009. And since 2009 it has exploded worldwide.

16. Difference between ETF trading SPY and index fund

The primary difference between an exchange-traded fund (ETF) and an index fund (a mutual fund that tracks a market index) is that ETFs can be traded (bought and sold) at any time during the trading day. On the other hand, mutual funds can only be bought or sold at the end of each trading day at their net asset value.

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