Day traders attempt to make profits by opening and closing trade positions several times during the day. They usually close all of their open positions at the end of the day and don’t carry them over to the next day.

In addition to stocks, exchange-traded funds (ETFs ) have emerged as another instrument of choice for day trading. They offer the diversification of a mutual fund, the high liquidity and real-time trading of a stock, and low transaction costs. A few ETFs may also qualify for tax benefits, depending upon the eligibility criteria and financial regulations.

This article explores the top ETFs, which are suitable for day trading, with the information provided as of May 24, 2021.

Key Takeaways

  • The goal of day trading is to make profits by opening and closing trading positions several times during a trading day.
  • Most day traders close all of their positions at the end of the day and do not carry any over to the following day.
  • Day traders use stocks as an investment instrument but also use exchange-traded funds (ETFs).
  • Ideal ETFs for day traders should have high liquidity, low transaction costs, and tight bid-ask spreads.
  • Some of the best ETFs for day traders include those that track the S&P 500 Index, the Dow Jones Broad Market Index, and Treasuries.

Criteria for Selection

Day trading involves buying and selling positions quickly, with attempts to make small profits by trading large volumes from multiple trades. The ETFs suitable for day trading should have high levels of liquidity, enabling easy execution of the trades at fair prices.

The transaction costs associated with ETF trading should be low, as frequent trading leads to high transaction costs that eat into the available profit potential. Additionally, one should also consider the bid-ask spread on the price quotes. The bid-ask spread is the difference between the buy and sell price demanded by the market participants trading a particular security. A tighter bid-ask spread indicates fair price discovery and higher liquidity.

Most ETFs that fit these three criteria are based on broader markets (like those based on popular indexes like the Standard & Poor's 500 Index or overall broader markets).

Day traders may also get high liquidity in specialized theme-based ETFs, like gold or oil-based ETFs. However, such ETFs may be costly regarding transaction costs making them unsuitable for day trading.

Similarly, others like leveraged ETFs may offer high exposure (two times or three times the underlying), but they usually lack high liquidity and may come at high expense ratios. Such ETFs may not fit the day trading criteria and are not considered for inclusion in the list of day trading.

The Top ETFs for Day Trading

1. Vanguard S&P 500 ETF (VOO): VOO tracks the popular S&P 500 Index, which represents the top 500 companies in the U.S. from diverse sectors. This ETF invests in the stocks included in the S&P 500 Index in a similar proportion to the index. It has successfully mirrored the performance of the index with a minimal tracking error. With an average daily traded volume of 4.6 million shares, VOO has one of the lowest expense ratios of only 0.03%, making it the favorite for day traders.

2. iShares Core S&P 500 ETF (IVV) and SPDR S&P 500 ETF Trust (SPY): IVV and SPY work the same way as the above-mentioned VOO ETF. The only difference is that SPY has a slightly higher expense ratio of 0.09%. IVV has the same expense ratio as VOO: 0.03%. In addition, SPY offers much higher levels of liquidity with an average daily trading volume of 88.6 million shares.

3. Vanguard Total Stock Market ETF (VTI): VTI tracks and attempts to replicate the performance of the CRSP U.S. Total Market Index. This index includes large-capmid-capsmall-cap, and micro-cap stocks that are regularly traded on the NYSE and the NASDAQ. This ETF allows a trader to bet on a larger total market covering a broader spectrum of stocks across multiple market cap sectors. With only a 0.03% expense ratio and an average daily trading volume of 4.3 million shares, VTI makes an excellent choice for day traders.

4. Schwab U.S. Broad Market ETF (SCHB): Another broad level market-based ETF, this one tracks the Dow Jones U.S. Broad Stock Market Index. The index includes the top 2,500 largest publicly traded companies in the U.S. This ETF has an average daily trading volume of around 500,000 shares and comes with a low expense ratio of 0.03%.

5. iShares Treasury Floating Rate Bond ETF (TFLO): Day traders interested in a bond ETF will find TFLO a good and cost-effective option. This fund attempts to replicate the performance of the Barclays U.S. Treasury Floating Rate Index. This ETF has been successful in replicating the performance of the benchmark index accurately with a very low tracking error. It has an expense ratio of 0.15% but offers a fee waiver of the same amount that makes the effective expense ratio nil.

6. iShares 20+ Year Treasury Bond ETF (TLT): TLT is another bond-based ETF, which provides exposure to long-term U.S. Treasury securities by tracking the performance of the ICE U.S. Treasury 20+ Year Index. It offers high liquidity with 16 million ETF shares exchanging hands daily on average. It has mirrored the performance of the benchmark index accurately. However, it has a comparatively higher expense ratio of 0.15%.

7. Schwab U.S. TIPS ETF (SCHP): Worried about inflation or looking to benefit from trading on inflation-protected securities? SCHP offers a perfect fit. It tracks the performance of the Bloomberg Barclays U.S. Treasury Inflation-Linked Securities (Series-L) Bond Index, which is a market-value weighted index of U.S. Treasury inflation-protected securities with at least one year remaining in maturity. With around 2.2 million shares trading daily on average and with only a 0.05% expense ratio, SCHP offers a good fit for day traders.

The Bottom Line

Day trading involves high risk, as most day traders take margin-based leveraged positions. Margin-based leverage allows one to take a higher exposure with low trading capital.

Therefore, it becomes critical to keep the associated transaction costs low to accommodate for the occasional losses and to keep the realistic profits high. Selecting the right ETFs with the above-mentioned criteria can enable a day trader to capture higher profits.