An ETF is simply a bundle of securities that you purchase. The fund issues shares that are traded throughout the day and track an index or a hypothetical bunch of holdings that represent part of the market. But should ETFs be held long term?
Exchange-traded funds, or ETFs, can often be a good choice for long-term investors. Whilst it depends on which ETF you choose, and what the ETF contains, ETFs can be a hassle-free way to incorporate buy-and-hold investments into your portfolio.
What is an ETF?
ETFs also invest in multiple and differing market sectors. They are similar to mutual funds in their make-up but are traded on the market more like normal stocks. An ETF price fluctuates during the day as stocks are bought and sold. A major advantage of ETFs is that they typically have lower expense ratios and fewer brokerage commissions than individual stocks do.
What is a buy-and-hold investment?
A buy-and-hold investment is simply an investment that you plan to buy for the long term, instead of buying and trading shares frequently. Many investors purchase buy-and-hold investments to prepare for things like retirement or other costly events in life, such as a child’s university tuition.
What are the different types of ETFs?
There are multiple types of ETFs which you can invest in. The following are the different types of ETFs:
- Bond ETFs include government bonds, corporate bonds, and municipal (state and local) bonds.
- Industry ETFs track trading in a specific industry.
- Commodity ETFs invest in commodities such as oil and gold.
- Currency ETFs invest in foreign currencies throughout the world.
- Inverse ETFs try to earn gains by shorting stocks when a decline is likely.
Benefits of holding ETFs long term
Understanding investing in an ETF long term
Many investors do not take the time to truly understand ETFs. Since ETFs are managed, some investors may not have a good idea of what their ETFs are doing. Making sure you choose an ETF in a sector that you understand and are knowledgeable about is key to investing in an ETF responsibly.
It is also important to understand that you will pay a manager a fee for taking care of your ETF. Also, unlike stocks, an ETF is not always commission-free, even on trading platforms that offer free trades.
Using an ETF to access more expensive funds
Now, let’s talk about what investing in an ETF long-term can do for you. An ETF can help you gain access to more expensive funds. There are many financial benefits that come with investing in an ETF, especially if you are interested in a stock that may be too costly to purchase individually.
An ETF can help you to purchase more expensive stocks, such as those on the S&P 500. The S&P indexes the 500 top trading companies. Share prices on the S&P 500 tend to be costly, and since most investors cannot afford to spend thousands on a single share, purchasing an ETF is one way to have access to these stocks at a cheaper price. ETFs which track the S&P are often much more affordable, so investing in one long term could prove to be a sound financial investment.
For example, the iShares Core S&P currently trades at $393.87. This is a price more investors can afford. By purchasing an ETF you are able to invest in the S&P 500 at a much lower cost.
ETFs provide for an easy way of investing
ETFs offer a hassle-free way of diversifying your portfolio. By investing in an ETF, you will be able to access many stocks that are diversified. This can help you to grow your portfolio drastically.
Investing in a single stock can be much riskier than investing in an ETF, as they offer a bundle of differing securities. A fund manager, which ETFs have, will also meticulously decide which stocks to include in the fund, taking out the guesswork for you.
Having a manager makes investing all the more simple. A manager does the work for you in exchange for a fee, leaving you to focus on other parts of the market for other investments. Managers can take action if they see that a company may be failing. This can save you money if you aren’t up to date with the latest news about stocks you are investing in.
How safe are ETFs as long-term investments?
ETFs are generally considered a safer bet than risking your money on individual stocks. Due to the level of diversification achieved by an ETF, including multiple stocks, an ETF has less risk involved with purchasing.
Investing in funds that track the entire performance of the market, especially that in the U.S., is considered a safe and worthwhile investment. This is because the U.S. stock market is projected to increase in value over time.
However, it is important to be careful when investing in ETFs that are double or triple leveraged. If they decrease in value, you will lose two or three times the value of the decline. For example, if you are invested in an ETF that is triple leveraged, if the price falls by 20%, your investment will fall by 60% or three times the amount of the triple leveraged ETF. For this reason, you will need to understand your ETF to avoid losing money in the market.
Holding ETFs short term
ETFs are not generally advised to be held as short-term investments. This is due to the market’s tendency to be volatile. Using an ETF as a buy-and-hold investment has proven to be a much better choice.
With that said, during a market crash, it can be worth your while to invest in an ETF short term. Doing so can help you profit from a so-called swing trade. You should keep in mind however, it is difficult to know how long it might take for the market to correct itself.
Most importantly, do not make any short-term investments, especially in ETFs, if you are looking for a quick return or will need the money in a hurry.
What are the best ETFs for long-term investing?
Some of the best ETFs for long-term investing are offered by Vanguard. This is because Vanguard’s ETFs are very diversified, leaving little room for failure. Both the Vanguard S&P and the Vanguard Total ETFs are a good choice for newer investors looking for a long-term investment with a good return.
The bottom line
Investing in an ETF is a sound long-term investment. These types of funds offer security, professional management, and portfolio diversification. Make sure you understand what all is included in your ETF and if it is industry-specific before making the investment. In general, investing in an ETF for the long term can be a sound financial move, especially for novice investors.
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