Before you decide to purchase Exchange Traded Funds (ETFs), here are some things to consider:
1. What is your investment strategy?
Why do you want to buy an Exchange Traded Fund (ETF)? Are you looking for exposure to the general market? Do you want to invest in a specific industry? Are you looking to hedge a portion of your portfolio? You need to identify the right investment strategy that will set you on the right path to choosing the most effective ETFs for your portfolio.
2. What are your investment goals?
How long do you plan to hold this Exchange Traded Fund (ETF)? Do you want to invest for the long term, or is this a short-term investment? There are different pros and cons of ETFs depending on your investment horizon. For example, ETFs allow liquidity – investors can buy and sell their shares almost frequently. This easy trading can be beneficial for investors who may want to access the money they’ve made from investing in the ETF.
However, because ETFs track an underlying index, investors are more likely to achieve greater returns on their investment over the long term.
Note: Before you put all your eggs in one basket, think about when you plan to use that money – there may be better options for short-term growth, like a six-month certificate of deposit.
3. Understand the ETF and its assets
Do your research on the ETF you’ve chosen and all the assets it contains. While you may be looking for country-wide or market or sector exposure, that doesn’t mean you shouldn’t study the stocks within the ETF. For example, some ETFs have a few technology stocks, like the Vanguard Information Technology ETF (VGT), while others may have fewer. If there’s any stock that could hinder performance (in your opinion), it may not be the ideal investment for your portfolio.
4. Know the costs, commissions, and fees
ETFs can be a cost-effective investment in most cases, but you still need to weigh the costs associated with the ETF against similar investments like index funds and mutual funds. Moreover, nowadays, many online brokerage platforms feature commission-free ETF trading.
Some ETFs are actively managed and therefore have additional management fees (known as the ETF’s total expense ratio). Also, if you are actively trading ETFs, be sure to include commissions in your cost calculations; even when trading is commission-free, you should be aware of the difference between the buy price and the sell price. Be aware of all the related costs before purchasing an ETF.
When it comes to trading fees, ETFs are cost-effective. When buying or selling a basket of an index, you may pay commissions on each individual stock trade within it.
The same applies to mutual funds. When buying or selling an ETF, it’s one transaction – one deal. While ETFs carry expense ratios and management fees, they are generally lower than those of mutual funds. For example, the expense ratio for the Vanguard Information Technology ETF (VGT) is only 0.10% – just $10 for every $10,000 you invest.
5. ETFs still have tax implications
How
Can buying or selling an exchange-traded fund impact your tax returns? While exchange-traded funds (ETFs) in the United States enjoy many tax advantages, a foreign index fund may not be tax-friendly and may therefore not be cost-effective. Tax implications vary from region to region. Regardless, you may have to pay tax on the gains from your investments in ETFs, just like you do with other investments.
The beauty of ETFs is that they are easy to buy and trade. All you need is an online broker. Generally, ETFs are liquid and trade openly during market hours.
However, this doesn’t mean that you should just jump into the waters of ETFs without considering the factors that may make these investments the right or wrong choice for your portfolio.
6. You can also track the index inversely using ETFs
Yes, you read that right. You can buy an exchange-traded fund (ETF) and open a short position. These are called “inverse ETFs,” and they allow you to track the index or underlying asset inversely without worrying about margin constraints or short selling. These options can help you hedge against a bear market. If you are a more experienced investor, you can use an inverse ETF that is leveraged for greater returns.
Note: Leveraged ETFs can be risky. Leveraged ETFs aim to achieve a return of 1x to 3x the returns of the underlying index. Inverse ETFs aim to achieve the opposite return of the underlying index. So, if the market declines, the inverse ETF will rise. And if it’s leveraged, you might see even greater returns. However, if the market rises, inverse ETFs will decline – and the losses can be larger.
ETFs and your portfolio
ETFs are great options for earnings season. There are leveraged index funds for investors with a higher risk tolerance, and traders can play stability with ETF options. The strategies are endless.
If you enjoy playing in the market, hedging your risks, or even investing in foreign sectors, you might want to buy an exchange-traded fund. ETFs are becoming more popular day by day, and the choices have never been greater for a good reason. Review your options and then buy the best ETFs for your portfolio.
Source: https://www.thebalancemoney.com/five-things-to-consider-before-you-buy-etfs-1214737
Leave a Reply