How ETFs Have Changed Investing

ETFs have come a long way in changing the investing landscape since the first one hit the market in 1993.

ETFs enable individual investors to engage in investing strategies that are more sophisticated than ever before. Many of these strategies wouldn't have been feasible from a practical standpoint 15 years ago for most investors.

"With the broad array of ETFs' investment guidelines, there are so many things that you can do with them now," says Ed McRedmond, Senior Vice President of portfolio strategies for Invesco PowerShares.

Betting on the Bears

For example, ETFs now make it much easier for an investor to take a bearish position or hedge against downside risk. An inverse ETF such as the Short S&P 500 ProShares FundSH is designed to deliver a performance that is the opposite of the index that it tracks.

"In the past you would have had to buy protective puts or sell short," says Rich Romey, President of ETF Portfolio Solutions. "And if you went short, you had unlimited risk. Now with ETFs, your maximum possible loss is what you invest."

What if an investor is feeling generally bullish, but is wary of the prospects of a specific sector such as financials? Romey presents a strategy using ETFs to play off this sentiment.

"If you put $100,000 into an S&P 500-tracking ETF such as the SPDRsSPY or the iShares S&P 500 IndexIVV, but think financials will be a drag, you could then put an investment equal to one-half the weight of the financials -- or about $8,500 -- into the UltraShort Financials ProShares FundSKF," he says. "Because the fund returns twice the inverse of the financials, now you have effectively removed the financial piece from your holding."