Is it smart to only invest in ETFs?
Bottom line. ETFs make a great pick for many investors who are starting out as well as for those who simply don't want to do all the legwork required to own individual stocks. Though it's possible to find the big winners among individual stocks, you have strong odds of doing well consistently with ETFs.
You expose your portfolio to much higher risk with sector ETFs, so you should use them sparingly, but investing 5% to 10% of your total portfolio assets may be appropriate. If you want to be highly conservative, don't use these at all.
However, there are disadvantages of ETFs. They come with fees, can stray from the value of their underlying asset, and (like any investment) come with risks.
So if you're happy with a portfolio that performs comparably to the stock market as a whole, then sticking to S&P 500 ETFs alone isn't a bad idea. However, if you assemble a portfolio of individual stocks that perform better, you might enjoy a 12% or 15% return over time -- or more.
Mutual funds offer automatic investment plans and ETFs do not. These services facilitate regular contributions and allow investors a consistent way to grow their investments, especially for retirement.
Stock-picking offers an advantage over exchange-traded funds (ETFs) when there is a wide dispersion of returns from the mean. Exchange-traded funds (ETFs) offer advantages over stocks when the return from stocks in the sector has a narrow dispersion around the mean.
How many ETFs are enough? The answer depends on several factors when deciding how many ETFs you should own. Generally speaking, fewer than 10 ETFs are likely enough to diversify your portfolio, but this will vary depending on your financial goals, ranging from retirement savings to income generation.
With over 2,000 ETFs in existence, many feel at least half are subject to liquidity problems. Passive investing locks an investor into an investment strategy that guarantees average returns each and every year. I don't talk with many investors who are comfortable with average returns year-in and year-out.
Holding too many ETFs in your portfolio introduces inefficiencies that in the long term will have a detrimental impact on the risk/reward profile of your portfolio. For most personal investors, an optimal number of ETFs to hold would be 5 to 10 across asset classes, geographies, and other characteristics.
Interest rate changes are the primary culprit when bond exchange-traded funds (ETFs) lose value. As interest rates rise, the prices of existing bonds fall, which impacts the value of the ETFs holding these assets.
How much would $1000 invested in the S&P 500 in 1980 be worth today?
In 1980, had you invested a mere $1,000 in what went on to become the top-performing stock of S&P 500, then you would be sitting on a cool $1.2 million today.
Time is your most valuable resource when investing, so getting started early is often more important than investing hundreds of dollars per month. With as little as $100 per month, it's possible to build an investment portfolio worth hundreds of thousands of dollars or more while minimizing risk.
Assuming an average annual return rate of about 10% (a typical historical average), a $10,000 investment in the S&P 500 could potentially grow to approximately $25,937 over 10 years.
ETFs often generate fewer capital gains for investors than mutual funds. This is partly because so many of them are passively managed and don't change their holdings that often.
- 1) Market Risk. The single biggest risk in ETFs is market risk. ...
- 2) "Judge A Book By Its Cover" Risk. The second biggest risk we see in ETFs is the "judge a book by its cover" risk. ...
- 3) Exotic-Exposure Risk. ...
- 4) Tax Risk. ...
- 5) Counterparty Risk. ...
- 6) Shutdown Risk. ...
- 7) Hot-New-Thing Risk. ...
- 8) Crowded-Trade Risk.
The U.S. stock market is considered to offer the highest investment returns over time. Higher returns, however, come with higher risk. Stock prices typically are more volatile than bond prices.
How long should you keep ETFs? It depends on your investment goals and how long you want to stay invested in ETFs. While a long-term ETF holding for more than three years can get you better returns, short-term returns can also be more for some ETFs.
In the long term, new risks arise. Because of how leveraged ETFs are constructed, they are only intended for very short holding periods, such as intraday. Over time, their value will tend to decay even if the underlying price movements are favorable.
There is no required minimum holding period for an ETF. But you should be careful about trading an ETF too frequently.
If you buy substantially identical security within 30 days before or after a sale at a loss, you are subject to the wash sale rule. This prevents you from claiming the loss at this time.
Can you become a millionaire with ETFs?
With enough time and consistency, you can earn well over $1 million with ETFs while still limiting your risk.
$500 is a great start. It will allow you to begin learning along the way. As to the investment you should get - there are many ETFs just be sure to research them and go with the one you are most confident about.
| ETF | Assets under management | Expense ratio |
|---|---|---|
| Invesco QQQ Trust (ticker: QQQ) | $244 billion | 0.2% |
| VanEck Semiconductor ETF (SMH) | $14 billion | 0.35% |
| Consumer Discretionary Select Sector SPDR Fund (XLY) | $19 billion | 0.09% |
| Global X Uranium ETF (URA) | $3 billion | 0.69% |
| Symbol | Name | 5-Year Return |
|---|---|---|
| IYW | iShares U.S. Technology ETF | 24.75% |
| XSD | SPDR S&P Semiconductor ETF | 24.23% |
| SPXL | Direxion Daily S&P 500 Bull 3X Shares | 23.64% |
| FTEC | Fidelity MSCI Information Technology Index ETF | 23.51% |
There is no reason to buy multiple ETFs targeting the same segment (don't need to buy two different S&P 500 ETFs). However, many people do use multiple ETFs to create the desired factor diversification. For example, someone might have a portfolio with: VTI or FXROX - US Total Stock Market.
