Tickers in this Article: SMH, SLV, EEM, PSQ, FRE, FNM, AIG, X, GM
The current financial landscape market can easily be compared to a field full of land mines. The bear market has taken a major swipe at many companies' stock prices. In the worst cases, companies were unable to recover and the bear market proved fatal. Even century-old icons like Bear Stearns have been crushed in the avalanche that is the recent global financial crisis.

So what can be considered a safe investment for a retail investor, when any stock can be cut in half in a few months' time? Stocks once considered conservative investments, such as Freddie Mac (NYSE:FRE), Fannie Mae (NYSE:FNM) and American International Group (NYSE:AIG), have left many investors shell shocked. The destruction hasn't been limited to financial stocks either. Stocks like United States Steel Corporation (NYSE:X) and General Motors Corporation (NYSE:GM) have also suffered through devastating moves lower.

Luckily for investors, the recent proliferation of exchange traded funds (ETFs) has left market participants with a plethora of options to trade. An ETF is a portfolio of stocks, bonds, or other investment class; it trades on a stock exchange much the same as a regular stock does. ETFs are essentially index funds in that they track the performance of a specific index or asset. There are currently more than 600 listed ETFs tracking almost every imaginable sector and its inverse. A trader could easily focus on solely ETFs and have little trouble finding trading candidates. In doing so, they would avoid many of the pitfalls that plague stock investors, such as adverse news releases or unfavorable earnings reports. (For more, see Introduction To Exchange-Traded Funds.)

One sector that has been strong lately has been the semiconductors. Rather than gamble on a specific semiconductor stock, an investor could look at the Semiconductor Holders (NYSE:SMH) ETF. This ETF tracks several semiconductor stocks and provides some diversification for the average investor. It recently cleared a four-month base that could hold as an important bottom.

Source: StockCharts.com

Another benefit of trading ETFs is that a trader can choose to trade a commodity without getting involved with futures. This gives investors a nice alternative in case the financial markets continue with last year's free fall. For instance, the iShares Silver Trust (NYSE:SLV) ETF tracks the price of an ounce of silver. In looking at the chart for SLV, it looks like it has been forming a cup and handle base with the breakout point at just over $14.

Source: StockCharts.com

Another option available to investors is ETFs that track foreign markets. The iShares MSCI Emerging Markets (NYSE:EEM) is a nice option in that it tracks publicly traded companies in emerging markets. A current holdings list shows stocks trading in several markets including China and Brazil. This offers investors even more diversification as it shields investors from a falling dollar or continued weakness in the U.S. markets. EEM is showing a similar base to SMH in that it has formed a base over several months and has recently broken above it.

Source: StockCharts.com

With the introduction of inverse funds, ETFs now also provide investors with an option that goes up as the markets go down. This provides investors who can't or don't like to short stocks with an alternative. It can also be used as a possible hedging tool to be used in combination with long funds. The Short QQQ ProShares (NYSE:PSQ) is an inverse ETF that corresponds with the opposite of the daily performance of the Nasdaq-100 Index. Currently PSQ looks like it has broken under a descending triangle base, or double top, and could be headed for a test of the $55 level.

Source: StockCharts.com


Bottom Line
The single largest benefit to trading an ETF is having reduced exposure to any one stock. As this market and history has shown, any single stock can disappear overnight. While the number of stocks going bankrupt is relatively small relative to the number of listed companies, holding stocks overnight still has considerable risk for adverse moves. Often stocks can have sharp reactions to an earnings report or news release, and ETFs can help reduce exposure to these events. Risk management may be the single most important factor for a trader's success, and ETFs help in this regard. To learn more, see Five Ways To Find A Winning ETF or join us in the Investopedia Community.

At the time of writing Joey Fundora did not own shares in any of the companies mentioned in this article.

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