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Can You Use ETFs for Swing Trading? (Insights)

Last Updated on 10 February, 2024 by Rejaul Karim

The long-term buy-and-hold strategy is favored by many more passive investors, but savvy and active traders have also embraced another form of trading — swing trading — swing trading which attempts to capture the bulk of a price move and stay away during pullbacks and consolidations. While it is a popular method for trading stocks, can you use ETFs for swing trading?

Yes, you can use ETFs for swing trading because they have enough liquidity and the volatility is just optimal — not too high and not too low. Moreover, ETF trading does not carry a high trading cost like mutual funds. In fact, some online discount brokers now offer commission-free ETF trading.

In this post, we will discuss the following:

Can You Use ETFs for Swing Trading? (Insights)

What is swing trading?

Swing trading is a style of trading in which the trader aims to profit from medium-term price moves. These kinds of price moves are seen on the daily timeframe as individual price swings, especially the impulse swings, which tend to last from a few days to a few weeks. So, a swing trader normally leaves his/her trades open beyond the trading day but not more than a few weeks. On some rare occasions, a price swing can last up to several weeks, and the trade can live their trades for many weeks if necessary.

Therefore, swing trading lies in the middle of the spectrum between day trading, in which the trades are closed on the same trading day, and position (long-term) trading or buy-and-hold investing, in which trades are left for a long time — several months, years, or even decades.  The main idea in swing trading is to make a lot of small wins that can add up to significant returns over the long term. For instance, while a position trader may wait for 10 months or a full year to earn a 25% profit, a swing trader may earn 5% gains every month and make a 50% profit in 10 months, which exceeds the position trader’s gains over the same period.

Swing traders mostly try to trade only the impulse swings, which are the price swings that move in the direction of the overall trend. So, in an uptrend, they want to trade the upswings, and in a downtrend, they want to trade only downswings. However, if the market is moving sideways, where both the upswings and downswings may be tradable, a swing trader may decide to trade both long and short whenever a trading opportunity occurs in either direction.

Most swing traders make use of the technical analysis in spotting tradable opportunities in the markets, so they study the price charts on the daily timeframe but may step down to the 4-hourly timeframe to pick better trade entry levels. On rare occasions, they may also pay attention to fundamental factors. Swing trading is not like day trading where traders spend all day monitoring and analyzing the price charts on the lower timeframes; here, the traders only need to check the charts at the end of the trading day (or 4-hourly when a trade setup is in sight). So, swing trading is suitable for both a beginner who is still trying to find his fit in the market and an experienced trader who wishes to trade part-time while keeping their full-time job. The advantages of the trading approach include the following:

  • Good market timing: In swing trading, you can time your trade entry and exit more accurately by trying to enter at the beginning of the swing and exit before the swing ends. There are many technical analysis strategies you can use for this purpose, including mean reversion and momentum strategies.
  • Flexibility in the use of trading capital: Unlike the buy-and-hold method, swing trading doesn’t tie your capital down in one security for a long time. You hop into the market when there is an opportunity to make money and hop out when the opportunity is no longer there — at worst, you come out with a small loss. The point is, at every point, your capital is either making you money or it’s free to be deployed somewhere else.
  • Active risk management: Swing trading requires you to manage risk actively by controlling your trade volume and using a stop loss. This helps you to protect your capital and also ensure that your capital is always working to make you money.
  • Not time demanding: Interestingly, swing trading doesn’t take much of your time. Thirty minutes or less a day may be all you need.

While most traders swing-trade stocks, commodity and equity futures, and Forex, you can also swing-trade ETFs.


Can You Use ETFs for Swing Trading? (Insights)

ETFs: what are they?

An ETF is a basket of securities that you can buy or sell through a brokerage firm on a stock exchange. Unlike mutual funds that can only be traded at the end of the trading day, ETFs are traded on the exchange all through the trading hours, just like stocks. ETFs are offered on virtually every conceivable asset class from stocks and bonds to alternative assets like commodities or currencies.

ETFs often track an underlying index: a well-known example is the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 Index. However, an ETF can also consist of hundreds or thousands of stocks across various industries or be isolated to one particular industry or sector. Some ETFs focus on only U.S. offerings, while others have a global outlook. In 2020, ETFs are estimated at just under $4.5 trillion with nearly 2,177 ETF products traded on US stock exchanges.

Types of ETFs

There are various types of ETFs available to investors and traders for both long-term investing and short-term swing trading. Here are the main categories:

  • Market ETFs: These are designed to track a particular index, such as the S&P 500 or NASDAQ.
  • Sector and industry ETFs: They are designed to provide exposure to a particular industry, such as oil, pharmaceuticals, or high technology.
  • Style ETFs: These are ETFs designed to track an investment style or market capitalization focus, such as large-cap value or small-cap growth.
  • Inverse ETFs: These are designed to track the inverse of an index. The aim is to profit from a decline in the underlying market or index.
  • Actively managed ETFs: These are portfolios specifically created to outperform the market index, unlike most ETFs, which are designed to track an index.
  • Commodity ETFs: These are designed to track the price of a commodity, such as gold, oil, or corn.
  • Bond ETFs: They are created to provide exposure to virtually every type of bond available —S. Treasury, corporate, municipal, international, high-yield, and several more.
  • Foreign market ETFs: They are designed to track non-US markets, such as Japan’s Nikkei Index, FTSE 100 Index, or Hong Kong’s Hang Seng Index.
  • Exchange-traded notes (ETNs): They are mostly debt securities backed by the creditworthiness of the issuing bank and are created to provide access to illiquid markets; they have the added benefit of generating virtually no short-term capital gains taxes.
  • Alternative investment ETFs: These are innovative structures that allow investors to trade volatility or gain exposure to a particular investment strategy, such as currency carry or covered call writing.

How ETFs work

An ETF can be bought and sold on a stock exchange, just like company stock, during the trading day when the stock exchange is open. Just like a stock, an ETF has a ticker symbol, and its intraday price data can be easily obtained during the course of the trading day. The price of an ETF share unit changes throughout the trading day as the shares are bought and sold on the market.

However, unlike a company stock, the number of shares outstanding of an ETF can change daily because of the continuous creation of new shares and the redemption of existing shares. It is this ability of an ETF to issue and redeem shares on an ongoing basis that keeps the market price of ETFs in line with their underlying securities.

While ETFs are created for retail investors and traders, institutional investors play a key role in maintaining the liquidity and tracking integrity of the ETF through the purchase and sale of creation units — large blocks of ETF shares that can be exchanged for baskets of the underlying securities. For example, when the price of the ETF deviates from the underlying asset value, institutions utilize the arbitrage mechanism afforded by creation units to bring the ETF price back into line with the underlying asset value.

Why you can use ETFs for swing trading

To long-term investors, ETFs are instruments that offer them an inherently diversified portfolio, help them to avoid short-term capital gains taxes, and for some innovative ETFs, offer them inherent leverage. However, ETFs have several qualities that make them ideal for swing trading, and they include the following:

  • Multiple options available: There are many ETFs that short-term traders can choose from. On the U.S. stock exchanges alone, there are nearly 2,177 ETF products available for trading, so you have multiple options to choose from. You can use the available stock screening tools to select the ones you want to trade.
  • Transparency: Many ETFs are designed to track broad market or sector indexes, and index-based ETFs are required to publish their holdings daily. Moreover, you can see the objective of any ETF to know if it is suitable for short-term trading, given the prevailing market and economic conditions.
  • Highly marketable: ETFs are easy to trade since they are traded on an exchange. You can easily buy and sell at any time of the day, unlike most mutual funds that trade at the end of the trading day.
  • Going on the short side of the market: Some innovative ETFs, like the inverse ones, offers you the opportunity to take the short side of the index they are tracking. Thus, trading ETFs affords you the option of taking either side of the market without having a margins account.
  • Liquidity: Many ETFs are highly capitalized and have enormous liquidity. You can always have the market to buy or sell them whenever you want.
  • Optimal volatility: Being a portfolio of many stocks or other instruments, ETFs don’t have extreme volatility that makes trading difficult. But at the same time, some of them do have adequate volatility to make short-term speculations, such as swing trading, worthwhile.
  • Inherent leverage: Some ETFs are leveraged on their own. There are many 3x-leveraged ETFs that offer 3 times the returns of the index they are tracking.
  • Low trading cost: The cost of trading most ETFs is quite small, especially when compared with mutual funds. Some online discount brokers offer commission-free ETF trading, so buying and selling in a space of some weeks can be quite profitable.
  • A variety of order types: ETFs are traded like stocks, so investors can place a variety of order types, such as limit orders or stop-loss orders, which can’t be made with mutual funds.

How to use ETFs for swing trading

Swing trading ETFs is just like swing trading stocks because both are traded on the stock exchange and can be bought through a broker. Here are the steps to take when you want to start trading ETFs:

  • Choose the ETFs to swing-trade: The first thing is to do your research and choose the ETFs to trade. Check the objectives of the ETFs, the component stocks, the index it tracks, and the industry it covers. Also, study the price charts. There are many ETF screeners you can use to make the selection process easier for you. You may need to enroll in a swing trading course to learn how to choose the right ETFs to swing trade.
  • Open a trading account: To trade ETFs, you need to open a trading account with an online discount broker, such as TradeStation TD Ameritrade, or Interactive Brokers; a robo-advisor like Betterment or Wealthfront; or the fund creator, such as Vanguard or Fidelity. For swing trading, an online discount broker may be the best option if it offers commission-free EFT trading.
  • Start trading: Once you have funded your trading account, you can start trading. Be sure to have a trading plan with a robust entry and exit strategy. You can subscribe to a trading signal that tells you when to enter a trade and when to exit from a trade.

Some swing trading strategies you can use

There are many strategies traders use for swing trading stocks, and they also work well with ETFs. We will briefly discuss a few of those strategies that we know work quite well. They include the following:

Mean-reversion strategy

The mean-reversion strategy is one of the most common strategies used in swing trading. The strategy is based on the concept that statistical variables have a central tendency — tend to cluster around the mean value. In the case of the price of a financial instrument, the price tends to make exaggerated moves to either side of the mean price and then tries to revert to the mean. While trying to go back to the mean, the price overshoots again and tries to revert to the mean again.

The up and down swinging continues on and on, and this creates tradable opportunities that traders can exploit using some indicators and tools. The main thing is to identify when the price is in an oversold or overbought situation and is likely to reverse so that you can follow the reversal to the mean. Some of the indicators for identifying the oversold/overbought conditions include the Bollinger Bands, RSI, moving averages, and price action setups.

The breakout strategy

A breakout strategy aims to enter a trade when the price breaks above a known resistance level. When the price breaks above that level, it shows that there is a huge buying potential in the market, which might continue pushing the price higher. An example of this strategy is when the price closes above a 20-day high; in this case, you can go long.

The momentum strategy

The momentum strategy is also known as the trend-following strategy. It aims to trade in the direction of the trend after a temporary pullback in price movement. The idea is to trade the impulse wave in the direction of the trend and hop out when a pullback starts, which can erase the profits. To use this strategy, you must have a way of identifying when the impulse swing is about to start, and when it is about to end. Good knowledge of price action and price waves, trend lines, and support and resistance levels can help.

Important ETF swing trading tips that may help you

These are some important ETF trading tips that may help you when swing-trading ETFs:

  • Do your research before buying: Know the fund’s objectives before trading it
  • Use a commission-free broker or broker-dealer: It makes it easier to swift funds or trade different funds from different providers at the same time.
  • Study charts: Know when an ETF is in a trend and also take note of support and resistance levels
  • Pre-determine your buy/sell price points: It may be better to use limit orders instead of market orders.

Other useful ETF trading tips are as follows:

  • Choose ETFs with decent volume
  • Keep track of distribution dates
  • Avoid needless trading
  • Don’t place orders near the market open or close
  • Trade ETFs of foreign markets only when the underlying market is open
  • Do not trade when the market is volatile

Here you can find our archive with all our swing trading articles.



How does the price of an ETF change during the trading day?

The price of an ETF changes throughout the trading day as its shares are bought and sold on the market, just like individual stocks. This intraday pricing allows for real-time trading.

Why do ETFs stand out for swing trading?

ETFs offer multiple options, transparency, high marketability, the ability to go short, liquidity, optimal volatility, inherent leverage, and low trading costs. These qualities make them suitable for short-term trading strategies like swing trading.

How are creation units used by institutional investors in the ETF market?

Institutional investors play a key role in ETF liquidity and tracking integrity by utilizing creation units—large blocks of ETF shares. These can be exchanged for baskets of the underlying securities, helping to maintain market prices in line with the ETF’s value.

How can traders benefit from the transparency of ETFs?

Many ETFs, especially those tracking broad market or sector indexes, are required to publish their holdings daily. Traders can use this transparency to assess if an ETF is suitable for short-term trading based on prevailing market and economic conditions.


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