3 ETF Plays for Earnings Season

There’s a plethora of ways to utilize ETFs, and especially so during earnings season; below are three suggested trades you can add to your arsenal of strategies.

Take advantage of the broad-based nature of ETFs by using them as a hedge against any outsized single-stock positions you may have (and are worried about). For instance, let’s say your portfolio has a sizeable allocation to Intel (INTC) stock and you’re worried about the impact of a potentially volatile, and negative, earnings release.

If you then short-sell, or buy a put option on an ETF that holds a meaningful allocation to that same stock that you own, you can give yourself some sort of cushion in the event the company craters after an earnings release. An easy way to do this research is to use the Free Stock Exposure Tool —narrow down your list of ETFs, and then formulate a trading plan from there. In the case of Intel stock, using the Semiconductors ETF (SMH B) would be a wise choice given its heavy allocation to the chip-maker.

If you’re looking to capture short-term moves around earnings seasons, then you need to be focused on areas of the market that are known for delivering big surprises and massive price moves to go along with them. In other words, you need to watch the sector ETFs that correspond to the most volatile groups of stocks on earnings day.

Based on research from Bespoke, below are the earnings reactions profiled by sector:

Based on the data above, traders would be wise to focus on:

• Broad-Based Tech ETFs
• Broad-Based Consumer Discretionary ETFs

And some more granular options targeting Internet, Social Media, and Semiconductor stocks.

One of the challenges that traders face is finding setups with an attractive risk/reward—the frustration is that sometimes the market just won’t budge as much as you need it to. The real problem arises when you find yourself stretching for riskier opportunities given your narrower set of choices. One way to alleviate the challenge of finding “trade-worthy” opportunities is to add leverage to your strategy, but not in the traditional sense where you have to put more of your capital on the line.

If you’re looking to magnify your trading returns, you can do so without overexposing yourself to unnecessary risks—and you can do that in two ways:

1. Use Leveraged ETFs: Be sure to read about the risks and nuances associated with these types of instruments.
2. Integrate Options into your Trading Strategy: instead of speculating by simply buying a call or put, you can construct for example a bull call spread that has a clearly defined downside risk, while still enjoying the leverage component that is inherent to options.

There’s no shortage of trading strategies available at your fingertips thanks to the proliferation of ETFs. Remember that earnings season is a tumultuous time on Wall Street, so it’s important to take simple, but important, precautions when executing any sort of ETF trade; be sure to utilize limit orders when buying or selling and especially stop-losses for open positions in leveraged or inverse funds.

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