Day Trading vs. Swing Trading ETFs: How to Choose

August 30, 2023

Trades & Tutorials

By Dan Taylor

Swing trading offers a middle ground between the long-term approach of buy-and-hold investing and the frenetic pace of day trading. This trading style allows for strategies that capture gains or mitigate losses over a period of several days to weeks.

In recent years, the world of swing trading has expanded to include various asset classes, with Exchange-Traded Funds (ETFs) being one of the most promising. This article aims to explore the ins and outs of swing trading ETFs, providing you with valuable insights on why and how to engage in this increasingly popular trading style — and why it's superior to day trading.

Why Opt for Swing Trading Over Day Trading?

The appeal of swing trading resides in its equilibrium between time commitment and potential returns. Unlike day trading, where trading activities are compressed into single-day windows, often demanding constant vigilance, swing trading operates on a more relaxed timeline. Positions can be held for days or weeks, allowing investors to capitalize on short- to medium-term market trends. This longer window for trading provides several advantages over day trading:

Time for In-depth Analysis

Swing trading gives you the breathing room to perform a more comprehensive market analysis. While day trading often requires quick decisions based on real-time data, swing trading allows you to study market trends, economic indicators, and other influential factors at a less frenetic pace. This extra time can result in more informed and nuanced trading decisions.

Less Stress, More Balance

Day trading can be a high-stress endeavor, requiring traders to stay glued to multiple screens for market signals. In contrast, swing trading's less demanding nature can be a better fit for individuals who have other commitments like full-time jobs, families, or educational pursuits. You can execute your trading plan early in the morning or later in the evening, fitting trading into your life rather than structuring your life around trading.

Lower Transaction Costs

Day trading often involves making multiple trades within a single day, which can lead to higher transaction costs. Swing trading, with its fewer trades over longer periods, can mitigate these costs. Additionally, swing traders don't face the same regulatory hurdles as day traders, such as the pattern day trader rule, which requires a minimum account balance of $25,000.

Lower Emotional Toll

The emotional roller coaster associated with the rapid buying and selling in day trading can be draining. Swing trading offers a more measured approach, allowing traders to detach from the emotional highs and lows that can often accompany intraday strategies.

Enhanced Quality of Life

For many, the idea of sitting in front of a computer screen, scanning the markets for hours on end, is far from appealing. Swing trading offers a more balanced lifestyle, allowing you to participate in other activities and interests without sacrificing potential market gains.

In summary, swing trading offers an attractive middle ground for those looking for greater flexibility and lower stress levels than day trading can provide. It offers a practical path for those looking to actively engage with the markets, but in a manner that accommodates other life commitments.

What Are ETFs and How Do They Suit Swing Trading?

An Exchange-Traded Fund (ETF) is a type of investment fund that trades on stock exchanges, much like individual stocks. An ETF typically tracks an index, a particular sector, or a set of assets like commodities or bonds. Unlike mutual funds, which are only priced at the end of the trading day, ETFs are priced continuously throughout the day. They offer several advantages:

  • Diversification: ETFs usually track a broader market index or a specific sector, providing built-in diversification. This feature reduces the impact of a poor-performing individual stock on your overall portfolio, making it less risky when you're swing trading.
  • Flexibility: Various types of ETFs, such as index ETFs, sector ETFs, leveraged ETFs, and even inverse ETFs, offer multiple options for traders to design their swing trading strategies.
  • Lower Costs: Generally, ETFs come with a lower expense ratio compared to mutual funds. This is a crucial factor when swing trading, as lower costs can significantly impact your overall returns.

ETFs inherently align well with the principles of swing trading. Their diversified nature provides a safety cushion against extreme market volatility, yet they offer enough flexibility for traders to capitalize on short- to medium-term price movements. Moreover, the lower costs associated with ETFs can be particularly beneficial for swing traders who may not trade as frequently as day traders but still incur costs that can add up over time.

Can You Make Money Day Trading ETFs?

While the allure of quick profits often draws people to day trading, particularly with ETFs, it's crucial to understand why this method of trading is generally not advisable for most investors. Here are some reasons why day trading ETFs may not be the best idea:

Lack of In-depth Analysis

Day trading doesn't afford you the luxury of time to conduct thorough research on ETFs or their underlying assets. This can lead to uninformed trading decisions based on superficial signals, increasing the likelihood of poor outcomes.

High Transaction Costs

Each trade you make incurs a transaction cost, such as commissions or spreads, that can eat into your profits. Day trading, by its very nature, involves making multiple trades each day, leading to higher overall transaction costs. This can be particularly detrimental when trading ETFs, which may have wider bid-ask spreads than individual stocks.

Regulatory Hurdles

As mentioned, day traders are subject to the pattern day trader rule, which requires maintaining a minimum account balance of $25,000. This rule applies to any trader who executes four or more day trades within five business days. Falling below the minimum account balance can lead to trading restrictions on your account.

Potential for Significant Losses

The short-term nature of day trading makes it susceptible to sudden market volatility. While experienced day traders have risk management strategies, such as stop-loss orders, to mitigate these risks, the rapid pace of trading and the complex structure of some ETFs (such as leveraged or inverse ETFs) can lead to significant losses.

Inconsistent Profitability

Despite the glamorous stories of successful day traders, research suggests that the vast majority of day traders lose money over the long term. Consistent profitability through day trading is challenging and requires an exceptional skill set, rigorous discipline, and a substantial time commitment that most people can't afford.

In summary, while day trading ETFs might seem tempting, the potential downsides often outweigh the benefits for the average investor. The risks of high transaction costs, regulatory constraints, and the emotional and psychological toll make this trading style less advisable when compared to swing trading, which offers a more balanced and research-based approach to trading.

Advantages of Swing Trading ETFs

On the other hand, there are several main advantages when it comes to swing trading ETFs that make it preferrable to day trading.

Built-in Diversification

One of the most compelling benefits of swing trading ETFs is the built-in diversification they offer. Let's say you want to capitalize on a technology boom but aren't sure which companies will lead the way. Instead of betting on a single stock and taking on considerable risk, you could invest in a technology-focused ETF. This diversification helps to spread the risk and offers a buffer against market volatility, making it a fitting strategy for swing traders.

Flexibility in Trading Strategies

With a range of ETF types available—from sector-focused to international index-tracking—you can build various swing trading strategies. For instance, if you expect a short-term uptick in the healthcare sector, you might opt for a healthcare ETF. If you're bearish about market conditions, inverse ETFs allow you to profit from downward trends.

Lower Costs

As mentioned earlier, the lower expense ratios often associated with ETFs are an advantage for swing traders. This feature becomes even more valuable when you consider that swing trading doesn't require as many transactions as day trading. Fewer transactions mean fewer chances to rack up trading fees, which ultimately could lead to higher net profits.

Suitable for Various Market Conditions

Because ETFs can track virtually anything—from broad-market indices like the S&P 500 to specific sectors like clean energy—they can be adapted to various market conditions. In a bullish market, swing trading equity-focused ETFs can provide substantial gains. During bearish or volatile periods, more defensive ETFs or even inverse ETFs can be a safer bet for swing traders.

Risks and Considerations

While swing trading ETFs offers numerous advantages, it's essential to be aware of the risks and considerations involved. For example, leveraged and inverse ETFs can carry high risks, particularly over longer holding periods, which may not align well with the swing trading time frame. These types of ETFs can amplify gains but also magnify losses.

Another crucial point is that swing trading still demands a substantial commitment to market research and strategy planning. It may be less time-consuming than day trading, but failing to do your due diligence can cost you dearly.

How to Get Started: A Step-By-Step Guide

Ready to get started with swing trading ETFs? Follow these steps to get started.

Step 1: Assess Your Risk Tolerance

Before embarking on your swing trading journey, take the time to evaluate your risk tolerance. Given that swing trading can occur over several days to weeks, understanding your comfort level with market volatility is crucial. If you are risk-averse, consider more conservative ETFs like those that track broad-market indices or specialize in dividend-paying stocks.

Step 2: Examine Market Conditions

Different market conditions can favor different types of assets. For example, during economic expansions, cyclical or growth-oriented ETFs often outperform. Conversely, during downturns, defensive sectors like healthcare or consumer staples may offer safer investment opportunities.

Step 3: Research Capability

Swing trading ETFs doesn't require you to watch the markets all day, but it does require robust research. Understand the underlying assets within the ETF, as well as the sectors or markets they represent. Keep an eye out for economic indicators, news events, and earnings reports that could impact your chosen ETF.

Step 4: Check the Numbers

Liquidity is a critical factor in swing trading. ETFs with higher daily trading volumes offer better liquidity, making it easier to enter or exit positions. Moreover, review the expense ratio and take note of the bid-ask spread, which can impact the cost of trading.

Step 5: Plan for Retirement Through Smart Swing Trading Strategies

Swing trading may not be the first strategy that comes to mind for retirement planning, but its principles can be applied effectively for long-term wealth accumulation. Here’s how:

  • Diversify with Sector and International ETFs: Use swing trading strategies to allocate assets across various sectors and even international markets. This approach not only diversifies your portfolio but also allows you to capitalize on growth opportunities in different areas of the market over time.
  • Rebalance Regularly: The medium-term nature of swing trading enables you to review and rebalance your portfolio regularly. By doing so, you can adjust your holdings based on performance and future outlook, optimizing your portfolio for long-term growth.
  • Tax Efficiency: Swing trading can be more tax-efficient than day trading, particularly if you hold assets for more than a year, benefiting from lower long-term capital gains tax rates.
  • Dividend Reinvestment: Some ETFs pay dividends, which can be reinvested to purchase additional shares. Over time, this compounding effect can significantly boost your retirement savings.
  • Risk Management: Use swing trading techniques to set stop-loss and take-profit levels. This strategy can protect your gains and limit losses, an essential aspect of long-term wealth building.

Step 6: Leverage MarketGauge's Specialized Tools for Swing Trading ETFs

Swing trading ETFs can be a rewarding but complex endeavor, requiring the right mix of strategy, timing, and risk management. To elevate your swing trading game and align it with your retirement goals, consider utilizing MarketGauge’s suite of specialized tools and strategies. Here's how their specific products can help you:

ETF Sector Plus Strategy

Relevance to Swing Trading: This 100% automated system identifies the top 3 sector ETFs to invest in at any given time, making it ideal for swing traders who seek to capitalize on short- to medium-term market trends.

How it Helps: The ETF Sector Plus strategy saves you valuable research time by doing the hard work for you. The strategy has historically outperformed the market by 3 to 9 times since 2007, providing both conservative and aggressive portfolios that require only minutes per week to manage.

Performance Metrics:

  • Since 2007: +1364.9% vs. SPY: +217.2%
  • Avg. Annual: +19.1% vs. SPY: +7.8%

GEMS Portfolio

Relevance to Swing Trading: GEMS (Global ETFs: Macro & Sectors) allows you to diversify your swing trading activities across U.S. sectors, global equities, and other asset classes, perfectly aligning with the diversification needs of a swing trader.

How it Helps: With just a few clicks, you’ll receive a portfolio as globally diversified as a sophisticated hedge fund. This is especially useful for swing traders who aim for a balanced, globally diversified portfolio.

Performance Metrics:

  • Since 2007: +1311.8% vs. SPY: +217.2%
  • Avg. Annual: +18.7% vs. SPY: +7.8%

NASDAQ 100 All Stars

Relevance to Swing Trading: While this tool focuses on stocks within the NASDAQ 100 Index, it is invaluable for swing traders who also wish to dabble in the most dynamic stocks alongside ETFs.

How it Helps: With only 5 stocks to manage at any one time, this tool provides a focused approach for swing traders looking to benefit from high-growth opportunities.

Performance Metrics:

  • Since 2008: +1875.1% vs. QQQ: +780.2%
  • Avg. Annual: +24.2% vs. QQQ: +17.5%

Alpha Rotation Strategy

Relevance to Swing Trading: This quant model is designed to rotate between stocks, bonds, or cash depending on market conditions, providing swing traders with a dynamic asset allocation strategy that adapts to market trends.

How it Helps: If you're a swing trader interested in broadening your scope to include bonds and cash as potential assets, this strategy is particularly useful. It is also MarketGauge's easiest model to implement as it only uses two ETFs.

Performance Metrics:

  • Since 2008: +8509.28% vs. SPY: +217.2%
  • Avg. Annual: +39.08% vs. SPY: +7.8%

These MarketGauge tools not only align well with swing trading strategies but also offer proven performance metrics. By incorporating them into your swing trading approach, you can better position yourself for long-term financial success, including a more secure retirement.