ETFs appeal to many different types of investors because their low fees, tax efficiency and indexed approach make them a natural fit for long-term investors. Also, the ability to buy and sell ETFs during the day makes them attractive to traders.
There is also a middle ground of investors and advisors who use ETFs in so-called tactical asset allocation. “This strategy allows portfolio managers to create extra value by taking advantage of certain situations in the marketplace,” Investopedia explains. “It is as a moderately active strategy since managers return to the portfolio’s original strategic asset mix when desired short-term profits are achieved.”
ETFs can also be used in trend-following strategies centered around the 200-day moving averages. [An ETF Trend-Following Plan for All Seasons]
Some investors wonder how much they should trade ETFs. The answer, of course, depends on your individual situation, tolerance for risk, and other factors.
While some may “set-and-forget” ETF holdings, investors should still maintain some semblance of checking allocations if only to get into the habit of actively keeping tabs on the investments.
“A basket of ETFs certainly gives investors more diversity, more protection, but it’s good for all investors to get into the habit of looking regularly and asking, ‘Am I on track to meet my goals?’” Rajiv Silgardo, co-chief executive at BMO Global Asset Management, said, reports Eric Lam for the Financial Post. “One of the major lessons of the past few years is that ‘buy and hold’ does not mean ‘buy and forget.’”
Investors tend to get lulled into complacency as the ETF investment tool, with its cheap, broad market index approach, fits well with buy-and-hold investors. ETFs have an average expense ratio of about 0.55%, whereas the average expense on actively managed equity funds in 2011 was 0.93%, according to the Investment Company Institute. [What is an ETF? — Part 8: Trading Costs]