Exchange traded funds have become a popular investment tool to gain exposure to a myriad of market sectors and strategies, but investors should still take the time to plan out the best ways to utilize the funds.
ETFs are by no means a panacea for your investment woes. The products offer many advantages, but investors should also be aware of the potential drawbacks and limitations.
For instance, many know about ETFs’ ability to diversify a portfolio. Carl Richards, CFP, director of investor education at The BAM Alliance, for the New York Times, though, points out that there are ETFs that trade only sugar, or those that provide inverse silver exposure. While ETFs help divvy the investment world into smaller slices, investors should know that a well-diversified portfolio would only include a small allocation to more targeted exposures.
Due to the way the investments are structured, ETFs come with lower fees. Specifically, U.S.-listed ETFs have an average 0.61% expense ratio, according to XTF. Nevertheless, ETF expense ratios can range from a rock-bottom 0.04% to over 2%.
ETFs are also traded on a stock exchange like any other stocks. While this aspect would help active day traders move in and out of a tactical position, long-term investors would not utilize this intra-day trading feature as often – just because you can trade everyday, it does not mean you have to.
“Ultimately, E.T.F.’s are just another tool that should be evaluated alongside all of the other tools available to help you reach your goals,” Richards wrote. “To be clear, I’m not saying that all E.T.F.’s are bad. What I am saying is E.T.F.’s alone won’t solve our most vexing investing problem: our own behavior. In fact, they might just make it easier to behave badly.”
Here at ETF Trends, we try take human behavior out of the mix. Instead of relying on our fight-or-flight primal instincts, investors should adhere to a strict investment strategy to maintain clear exit and entry points. Specifically, we have a trend following strategy centered around the 200-day exponential moving average. When the trends cross over, we are in, and when the trends go out of favor, we know it is time to exit. [An ETF Trend-Following Plan for All Seasons]
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.