Are there disadvantages to day trading ETFs?
"ETFs are well suited to day trading, but you should be mindful of the bid-ask spread. See article: Commission-free ETFs are a great way to save money, but watch the bid-ask spread too. Bid-ask spread is largely a function of liquidity, or the volume of   buyers and sellers for an asset during a particular moment in time.   ... It may be more difficult to trade certain assets that are less   liquid, where bid-ask spreads can be higher. Think some penny stocks. If you have the choice, compare the spreads of the ETF and the target stock. Longer-term ""keep & hold"" trading on ETFs tracking futures can be somewhat disadvantageous.  Futures contracts roll-over every month.  Exchange traders have to sell and buy in on the next contract.  ETFs don't reflect the price differential between the futures contract. See here for more detail on that: Positioning For An Oil ETF Rebound? Watch For Contango Contango occurs when the price on a futures contract is higher than   the expected future spot price, which creates the upward sloping curve   on future commodity prices over time. Essentially, the phenomenon   reflects a current spot price that is lower than the futures price.   ... While this phenomena is a normal occurrence in the futures market,   contango can have a negative effect on ETFs."
The key two things to consider when looking at similar/identical ETFs is the typical (or 'indicative') spread, and the trading volume and size of the ETF. Just like regular stocks, thinly traded ETF's often have quite large spreads between buy and sell: in the 1.5-2%+ range in some cases. This is a huge drain if you make a lot of transactions and can easily be a much larger concern than a relatively trivial difference in ongoing charges depending on your exact expected trading frequency. Poor spreads are also generally related to a lack of liquidity, and illiquid assets are usually the first to become heavily disconnected from the underlying in cases where the authorized participants (APs) face issues. In general with stock ETFs that trade very liquid markets this has historically not been much of an issue, as the creation/redemption mechanism on these types of assets is pretty robust: it's consequences on typical spread is much more important for the average retail investor. On point #3, no, this would create an arbitrage which an authorized participant would quickly take advantage of. Worth reading up about the creation and redemption mechanism (here is a good place to start) to understand the exact way this happens in ETFs as it's very key to how they work. What is your investment goal?  Many investors buy for the long haul, not short-term gain.  If you're looking for long-term gain then daily fluctuations should be of no concern to you.  If you want to day-trade and time the market (buy low and sell high with a short holding period) then yes less volatile stock can be less profitable, but they also carry less risk.  In that case, though, transaction fees have more of an impact, and you usually have to trade in larger quantities to reduce the impact of transaction fees. Investopedia has a nice article on this here The Key benefit looks like better returns with lower capital. The disadvantage is few brokers offering that can be trusted. Potentially lower return due to margins / spreads. Higher leverage and can become an issue. I use over half my buying power of my portfolio for options, and I'm not a fan of any of the strategies listed above either (I stay away from negative theta trades for the most part), but I just listed them to point out that saying the reason someone wouldn't enter a short position is for fear of infinite losses is asinine. It's easy enough to make any trade risk defined if that is something the trader cares about. I'm a bit skeptical of some of the views the author states, in particular:  &gt; The likelihood of executing a trade at the best price depends on the length of the queue to buy or sell and the incentives to trade. Longer queues lead to longer delays to execute a trade. Delays typically lead to worse outcomes. Quite simply, it makes no sense to wait on a longer line to receive a worse execution.  Why would this be the case? If anything, I'd think that forcing through too many orders at once risks price slippage created by excess supply or demand. He argues that waiting in queue may impair price performance, but I'd think that possible favourable or adverse shifts in the price will average to zero over time.  If this is the case and they do average to zero, then I think funds are doing the savvy thing by putting relatively small, low-priority trades in to the flow at a rate that saves the most money on average. I can see why day traders may not be too thrilled with this, but that is such a small slice of the mutual fund/brokerage clientele.  In the broader picture, funds and brokerages are being squeezed so tightly on expense ratios that I'd think any cost saving/rebates they do get probably filter back to customers in the form of reduced fees. Take Robinhood as an example: they use their trading rebates to provide an extremely low cost trading platform for retail investors. That hardly seems unfair to me.  Any traders care to comment? This is all just speculation on my part and I've not looked at any time series data yet. There are a few ETFs that fall into the money market category: SHV, BIL, PVI and MINT.  What normally looks like an insignificant expense ratio looks pretty big when compared to the small yields offered by these funds. The same holds for the spread and transaction fees. For that reason, I'm not sure if the fund route is worth it. For long periods of time a short ETF's performance will not match the negative of the long ETF, e.g. funding costs and the fact that they 'only' match daily returns will result in a suboptimal performance.   If possible use other derivatives like a put on a long gold etf (fgriglesnickerseven) (After seeing your most recent comment on the original question, it looks like others have answered the question you intended, and described the extreme difficulty of getting the timing right the way you're trying to. Since I've already typed it up, what follows answers what I originally thought your question was, which was asking if there were drawbacks to investing entirely in money market funds to avoid stock volatility altogether.) Money market funds have the significant drawback that they offer low returns. One of the fundamental principles in finance is that there is a trade-off between low risk and high returns. While money market funds are extremely stable, their returns are paltry; under current market conditions, you can consider them roughly equivalent to cash. On the other hand, though investing in stocks puts your money on a roller coaster, returns will be, on average, substantially higher. Since people often invest in order to achieve personal financial stability, many feel naturally attracted to very stable investments like money market funds. However, this tendency can be a big mistake. The higher returns of the stock market don't merely serve to stoke an investor's greed, they are necessary for achieving most people's financial goals. For example, consider two hypothetical investors, saving for retirement over the course of a 40-year career. The first investor, apprehensive Adam, invests $10k per year in a money market fund. The second investor, brave Barbara, invests $10k per year in an S&P 500 index fund (reinvesting dividends). Let's be generous and say that Adam's money market fund keeps pace with inflation (in reality, they typically don't even do that). At the end of 40 years, in today's money, Adam will have $10,000*40 = $400,000, not nearly enough to retire comfortably on. On the other hand, let's assume that Barbara gets returns of 7% per year after inflation, which is typical (though not guaranteed). Barbara will then have, using the formula for the future value of an annuity, $10,000 * [(1.07)^40 - 1] / 0.07, or about $2,000,000, which is much more comfortable. While Adam's strategy produces nearly guaranteed results, those results are actually guaranteed failure. Barbara's strategy is not a guarantee, but it has a good chance of producing a comfortable retirement. Even if her timing isn't great, over these time scales, the chances that she will have more money than Adam in the end are very high. (I won't produce a technical analysis of this claim, as it's a bit complicated. Do more research if you're interested.) "This is an old post I feel requires some more love for completeness.  Though several responses have mentioned the inherent risks that currency speculation, leverage, and frequent trading of stocks or currencies bring about, more information, and possibly a combination of answers, is necessary to fully answer this question. My answer should probably not be the answer, just some additional information to help aid your (and others') decision(s). Firstly, as a retail investor, don't trade forex. Period. Major currency pairs arguably make up the most efficient market in the world, and as a layman, that puts you at a severe disadvantage. You mentioned you were a student—since you have something else to do other than trade currencies, implicitly you cannot spend all of your time researching, monitoring, and investigating the various (infinite) drivers of currency return. Since major financial institutions such as banks, broker-dealers, hedge-funds, brokerages, inter-dealer-brokers, mutual funds, ETF companies, etc..., do have highly intelligent people researching, monitoring, and investigating the various drivers of currency return at all times, you're unlikely to win against the opposing trader. Not impossible to win, just improbable; over time, that probability will rob you clean. Secondly, investing in individual businesses can be a worthwhile endeavor and, especially as a young student, one that could pay dividends (pun intended!) for a very long time. That being said, what I mentioned above also holds true for many large-capitalization equities—there are thousands, maybe millions, of very intelligent people who do nothing other than research a few individual stocks and are often paid quite handsomely to do so. As with forex, you will often be at a severe informational disadvantage when trading. So, view any purchase of a stock as a very long-term commitment—at least five years. And if you're going to invest in a stock, you must review the company's financial history—that means poring through 10-K/Q for several years (I typically examine a minimum ten years of financial statements) and reading the notes to the financial statements. Read the yearly MD&A (quarterly is usually too volatile to be useful for long term investors) – management discussion and analysis – but remember, management pays themselves with your money. I assure you: management will always place a cherry on top, even if that cherry does not exist. If you are a shareholder, any expense the company pays is partially an expense of yours—never forget that no matter how small a position, you have partial ownership of the business in which you're invested. Thirdly, I need to address the stark contrast and often (but not always!) deep conflict between the concepts of investment and speculation. According to Seth Klarman, written on page 21 in his famous Margin of Safety, ""both investments and speculations can be bought and sold. Both typically fluctuate in price and can thus appear to generate investment returns. But there is one critical difference: investments throw off cash flow for the benefit of the owners; speculations do not. The return to the owners of speculations depends exclusively on the vagaries of the resale market."" This seems simple and it is; but do not underestimate the profound distinction Mr. Klarman makes here. (and ask yourself—will forex pay you cash flows while you have a position on?) A simple litmus test prior to purchasing a stock might help to differentiate between investment and speculation: at what price are you willing to sell, and why? I typically require the answer to be at least 50% higher than the current salable price (so that I have a margin of safety) and that I will never sell unless there is a material operating change, accounting fraud, or more generally, regime change within the industry in which my company operates. Furthermore, I then research what types of operating changes will alter my opinion and how severe they need to be prior to a liquidation. I then write this in a journal to keep myself honest. This is the personal aspect to investing, the kind of thing you learn only by doing yourself—and it takes a lifetime to master. You can try various methodologies (there are tons of books) but overall just be cautious. Money lost does not return on its own. I've just scratched the surface of a 200,000 page investing book you need to read if you'd like to do this professionally or as a hobbyist. If this seems like too much or you want to wait until you've more time to research, consider index investing strategies (I won't delve into these here).  And because I'm an investment professional: please do not interpret anything you've read here as personal advice or as a solicitation to buy or sell any securities or types of securities, whatsoever. This has been provided for general informational purposes only. Contact a financial advisor to review your personal circumstances such as time horizon, risk tolerance, liquidity needs, and asset allocation strategies. Again, nothing written herein should be construed as individual advice." "Sorry but you already provided the answer to your own question.  The simple answer is to 'not day trade' but hold things for a longer period and don't trade a large number of different stocks every week. Seriously, have a look at the rules and see what it implies.. an average of 20 buys and sells of longer term positions PER DAY is a pretty fair bit of trading, that's really churning through the positions compared to someone who might establish positions with say 25 well picked stocks and might change even 5 of those a week to a different stock.  Or even a larger number of stocks but seeking to hold them for over a year so you get taxed at the long term cap gains rate. If you want to day trade, be prepared to be labeled as such and deal with your broker on that basis.  Not like they will hate you given all the fees you are likely to rack up.  And the government will love you also, since you'll be paying short term gains taxes.  (and trust me, us bogelheads appreciate the liquidity the speculative and short term folks bring to the market.) In terms of how it would impact you, Expect to be required to have a fairly substantial balance ($25K) if you are maintaining a margin account. I'd suggest reading this thread My account's been labeled as ""day trader"" and I got a big margin call. What should I do? What trades can I place in the blocked period?" "The T+3 ""rule"" relates only to accounting and not to trading.  It does not prevent you from day trading.  It simply means that the postings in you cash account will not appear until three business days after you have executed a trade.  When you execute a trade and the order has been filled, you have all of the information you need to know the cash amounts that will hit your account three business days later. In a cash account, cash postings that arise from trading are treated as unsettled (for three days), but this does not mean that these funds are available for further trading.  If you have $25,000 in your account on day 1, this does not mean that you will be able to trade more than $25,000 because your cash account has not yet been debited.  Most cash accounts will include an item detailing ""Cash available for trading"".  This will net out any unsettled business transacted. For example, if you have a cash account balance of $25,000 on day one, and on the same day you purchase $10,000 worth of shares, then pending settlement in your cash account you will only have $15,000 ""Cash available for trading"". Similarly, if you have a cash balance of $25,000 on day one, and on the same day you ""day trade"", purchasing $15,000 and selling $10,000 worth of shares, then you will have the net of $20,000 ""Cash available for trading"" ($20,000 = $25,000 - $15,000 + $10,000). If by ""prop account"" you mean an account where you give discretion to a broker to trade on your behalf, then I think the issues of accounting will be the least of your worries.  You will need to be worried about not being fleeced out of your hard earned savings by someone far more interested in lining their own pockets than making money for you." Well, let me take your question for baremetal, and aknowledge you did not asked about the difference between daytrading and investing which is obviously leverage. I would not consider daytrading more risky as long as you keep leverageout of the equation.  Daytrading can be turbolent and confusing, where things unfold in a very short amount of time, (let trade nfp payroll or some breaking event, yay), eventually the risk is more overseeable in long term trading, as soon as you put leverage into the equation things look vary different, indeed. I traded futures for a brief period in school using the BrokersXpress platform (now part of OptionsXpress, which is in turn now part of Charles Schwab). They had a virtual trading platform, and apparently still do, and it was excellent. Since my main account was enabled for futures, this carried over to the virtual account, so I could trade a whole range of futures, options, stocks, etc. I spoke with OptionsXpress, and you don't need to fund your acount to use the virtual trading platform. However, they will cancel your account after an arbitrary period of time if you don't log in every few days. According to their customer service, there is no inactivity fee on your main account if you don't fund it and make no trades. I also used Stock-Trak for a class and despite finding the occasional bug or website performance issue, it provided a good experience. I received a discount because I used it through an educational institution, and customer service was quite good (probably for the same reason), but I don't know if those same benefits would apply to an individual signing up for it.  I signed up for top10traders about seven years ago when I was in secondary school, and it's completely free. Unfortunately, you get what you pay for, and the interface was poorly designed and slow. Furthermore, at that time, there were no restrictions that limited the number of shares you could buy to the number of outstanding shares, so you could buy as many as you could afford, even if you exceeded the number that physically existed. While this isn't an issue for large companies, it meant you could earn a killing trading highly illiquid pink sheet stocks because you could purchase billions of shares of companies with only a few thousand shares actually outstanding. I don't know if these issues have been corrected or not, but at the time, I and several other users took advantage of these oversights to rack up hundreds of trillions of dollars in a matter of days, so if you want a realistic simulation, this isn't it.  Investopedia also has a stock simulator that I've heard positive things about, although I haven't used it personally. No, if your brokers find out about this, even though it is unlikely, you will be identified as a pattern day trader. The regulations do not specify a per broker limit. Also, it's like a credit history.  Brokers are loosely obligated to inform other brokers that a client is a pattern day trader when transferring accounts. Say for example a trade totals $10,000.  A flat tax of 0.2% would be $20.  This is not much for the Buy &amp; Holder b/c he only makes a few trades a year, say 10 transactions a year.  So their tax is only about $200 per year. (heck we could even drop it to 0.1%).  But DayTraders will routinely do 10 trades a day, or over 3000 trades a year.  So using that same 10K trade above, that could hypothetically be 3000x20 = $60,000 per year in taxes.  Computer Traders will do hundreds of trades per day.  Say 30,000 trades per year.  So that is $600,000.  So you can see how iit hardly affects legitimate investors, while making the HF traders control themselves a bit.  This is what we want.  The exchanges charge the flat tax with the transaction like a Sales tax.  It avoids excess regulation (the SEC already monitors trades, or is supposed to), and it hurts the gamblers (HFTs), while not hindering the good guys (investors).