Exchange traded funds are compatible for short term day traders but are also complementary to a buy-and-hold, long term strategy. These funds are also preferred because they take the guesswork out of stock picking.
“ETFs not only have allowed investors to get in on this risk-on, risk-off environment, but they have allowed many an immediate exposure to the market without having to identify the right stocks,” Mike Lenhoff for Brewing Dolphin Securities said in a recent report. [Are ETFs Turning Investors Into Day Traders?]
ETF ownership allows investors to own a basket of stocks and also get the advantage of spreading out assets over sectors and asset classes, reports Richard Rittorno for Emerging Money.
ETFs are also used for enhancing a short term strategy, especially with sectors such as currencies, commodities and leveraged funds. In fact, there are so many types of ETFs that every corner and niche of the market can be accessed with one fund. The one drawback for trading ETFs is that they can get expensive with every transaction fee. The low cost of an ETF has become a trademark advantage. [Are ETF Investors Better at Timing the Market?]
The real benefit of the low cost of an ETF is realized in a long term strategy. For example, if an investor purchases a fund such as the Vanguard Total Stock Market (NYSEAca: VTI) with an expense ratio of 0.07%, the yield of 1.95% can make up for the cost alone, and the chances of cost eating into principal is very low.
Another advantage that investors have with ETF investing is the competition going on within the business. Brokers are offering free trading with various in-house accounts in an attempt to gain more market share. An investor that has a strategy and can be selective on which funds to choose from can have an all-ETF portfolio at little or no cost. [An All-Seasons Model ETF Portfolio]
Furthermore, plenty of brokers are extending the commission-free trades into alternative retirement accounts, like an IRA, reports Rittorno.
Tisha Guerrero contributed to this article.