Etfs: Safest Bets For Long-Term Investment

Exchange-traded funds (ETFs) are an excellent entry point for new investors into the stock market. They are typically cheaper and less risky than individual stocks since they hold a diversified collection of investments. One way for beginners to get started is to buy ETFs that track broad market indexes, such as the S&P 500. This means you're investing in some of the largest companies in the country, with the goal of long-term returns.

When choosing an ETF, it's important to consider the risk and the fund's expense ratio, which is the amount you'll pay in fees every year. The lower the expense ratio, the less it will eat into your returns.

- Vanguard S&P 500 ETF

- Vanguard High Dividend Yield ETF

- Vanguard Real Estate ETF

- iShares Core S&P Total U.S. Stock Market ETF

- Consumer Staples Select Sector SPDR Fund

- iShares 0-3 Month Treasury Bond ETF

- Vanguard Utilities ETF

- iShares U.S. Healthcare Providers ETF

- Schwab U.S. TIPS ETF

Diversification and ETFs

Exchange-traded funds (ETFs) are a great way to diversify your investment portfolio. They are a collection of several stocks, bonds, commodities, or a combination of these, and each share you purchase gives you a slice of all of them. This makes it an easy way to diversify your portfolio.

ETFs are also a great way to diversify across horizontals, like industries. It would take a lot of money and effort to buy all the components of a particular basket, but with the click of a button, an ETF delivers those benefits to your portfolio. Diversification can help safeguard your portfolio against market volatility. If you invested in just one industry, and that industry had a really bad year, it's likely your portfolio would have performed poorly too. By investing across different industries, company sizes, geographies, and more, you give your portfolio more balance.

ETFs are also a great entry point for new investors into the stock market. They are relatively cheap and typically carry lower risk than individual stocks since a single fund holds a diversified collection of investments.

• Vanguard S&P 500 ETF: Tracks the performance of the S&P 500 large-cap benchmark index, investing in all 500 companies that make up the index. It has a low expense ratio of 0.03%.
• Vanguard High Dividend Yield ETF: Tracks an index of stocks with above-average dividend yields, investing in 556 different stocks. It has a low expense ratio of 0.06%.
• Vanguard Real Estate ETF: Targets stable REITs, offering dividends and slight S&P outperformance. It has a low expense ratio of 0.12%.
• IShares Core S&P Total U.S. Stock Market ETF: Aims to match the performance of the overall U.S. stock market, investing in almost 2,500 different stocks ranging from mega-cap giants to small-cap companies. It has a very low expense ratio of 0.03%.
• Consumer Staples Select Sector SPDR Fund: Invests in companies that sell things that people need, such as Procter & Gamble, PepsiCo, and Coca-Cola. It has a low expense ratio of 0.09%.
• IShares Russell 2000 ETF: Tracks the performance of small-cap companies, with a focus on providing diversified exposure to the U.S. small-cap stock market.
• Vanguard FTSE Developed Markets ETF: Provides exposure to large, mid, and small-cap companies in developed markets outside of the U.S., such as the U.K., Japan, and Canada.
• IShares Core MSCI EAFE ETF: Tracks the performance of large and mid-cap stocks in developed markets outside of North America, providing access to a diverse range of companies.
• Vanguard Total Bond Market ETF: Tracks the performance of the broad U.S. investment-grade bond market, including government, corporate, and international dollar-denominated bonds.
• IShares Core U.S. Aggregate Bond ETF: Tracks the performance of the broad U.S. investment-grade bond market, including government, corporate, mortgage-backed, and asset-backed securities.

These are just a few examples of ETFs that can help you diversify your investment portfolio. It's important to consider your financial goals, risk tolerance, and the specific industries or sectors you want to invest in when choosing the right ETFs for you.

ETFs and volatility

Exchange-Traded Funds (ETFs) are a great entry point for new investors into the stock market. They are typically cheaper and less risky than individual stocks since they hold a diversified collection of investments.

ETFs are also a good way to build an investment portfolio that isn't too dependent on the success of any particular stock or bond. However, not all ETFs are created equal, and some are much safer than others.

ETFs can be volatile, but they are generally considered safe because they don't rely too heavily on the performance of any individual stock. They also don't rely on the competence of investment managers as actively managed mutual funds or hedge funds do.

ETFs can be a smart way to build a diverse stock portfolio tailored to your investment goals, whether you're looking for income, growth, stability, or a combination of these.

Expense Ratio

The expense ratio is the annual fee you pay to own the fund, and it's expressed as a percentage of your investment. For example, a 0.03% expense ratio means you pay $0.30 per year for every $1,000 invested. Lower expense ratios are generally preferable as they eat less into your returns.

Commissions

While many brokers have dropped commissions to zero, some still charge a fee for buying or selling ETFs. These commissions can add up, especially if you trade frequently, so it's important to consider them when evaluating the overall cost of an ETF.

Trading Volume

Trading volume indicates how popular an ETF is and how actively it is traded. Higher trading volume generally means the ETF is more liquid and easier to buy or sell. Less frequently traded ETFs may be harder to unload when you want to sell.

Holdings

It's important to look at the top holdings of an ETF, which are the individual companies the fund invests in. You want to ensure that the ETF is well-diversified across different industries, company sizes, and geographies to reduce risk.

Performance

While past performance doesn't guarantee future results, it's still useful to compare the historical returns of similar ETFs. Look at long-term performance over three, five, or ten years to get a sense of how the ETF has done over time.

Risk and Volatility

Some ETFs are designed to track broad market indexes like the S&P 500, which tend to be less volatile than those focused on specific sectors or industries. During turbulent times or periods of uncertainty, broad-market ETFs may provide more stability.

Additionally, dividend-paying stocks, consumer staples, utilities, and healthcare sectors are typically considered more defensive and stable during tough economic times.

Tax Efficiency

ETFs have tax advantages over mutual funds. Mutual funds may incur capital gains taxes throughout the lifetime of your investment due to frequent trading, while ETFs only incur capital gains taxes when you sell. ETFs also give you more control over when you realize short-term or long-term capital gains, potentially reducing your tax burden.

Liquidity and Closure Risk

ETFs that aren't frequently traded may have liquidity issues, making it harder to sell when you want to. There's also a small risk that an ETF may close if it doesn't bring in enough assets to cover administrative costs, forcing you to sell prematurely and potentially at a loss.

In conclusion, while ETFs are generally less volatile than individual stocks due to their diversification, it's important to evaluate specific ETFs based on the factors mentioned above to make informed investment decisions.

Expense ratios

When it comes to investing in ETFs, one of the most important factors to consider is the expense ratio. This is the annual fee that you will pay to own the fund and is usually expressed as a percentage of the assets you have invested in the fund. For example, an expense ratio of 0.03% means you will pay $3 annually for every $10,000 invested.

ETFs are known for having low expense ratios compared to other types of funds, and this is one of the reasons they are a popular choice for investors. When considering the expense ratio of an ETF, it is important to remember that even a small difference in percentages can add up to a significant amount of money over time. For example, an expense ratio of 0.10% instead of 0.05% will cost you an extra $5 per year for every $10,000 invested.

While a lower expense ratio is generally preferable, it is also important to consider the performance and holdings of the ETF. A higher expense ratio may be justified if the ETF has a strong long-term performance record or invests in a specific industry or sector that aligns with your investment goals.

• Vanguard S&P 500 ETF (VOO) - with an expense ratio of 0.03%, this ETF tracks the performance of the S&P 500 index and is recommended by legendary investor Warren Buffett.
• IShares Core S&P 500 ETF (IVV) - this ETF also has an expense ratio of 0.03% and tracks the S&P 500 index.
• Schwab S&P 500 Index Fund (SWPPX) - with an even lower expense ratio of 0.02%, this mutual fund is sponsored by Charles Schwab and offers strong long-term performance.
• Vanguard Total Stock Market ETF (VTI) - this ETF has an expense ratio of 0.03% and offers broad diversification by investing in small, medium, and large companies across all sectors.

When evaluating ETFs, be sure to consider your investment goals, risk tolerance, and the overall performance and holdings of the fund, in addition to the expense ratio.

ETF vs mutual funds

When it comes to investing, there are a variety of options to choose from, each with its own unique advantages and disadvantages. Two of the most common investment vehicles are Exchange-Traded Funds (ETFs) and mutual funds. While both ETFs and mutual funds offer exposure to a wide range of asset classes and niche markets, there are some key differences between the two that investors should be aware of.

Similarities Between ETFs and Mutual Funds:

ETFs and mutual funds are similar in that they both represent professionally managed collections or "baskets" of individual stocks or bonds. They are also less risky than investing in individual stocks and bonds due to the built-in diversification they offer. Additionally, both ETFs and mutual funds give investors access to a wide variety of U.S. and international stocks and bonds, allowing for broad or narrow investment strategies depending on the investor's goals and style. Finally, both types of funds are overseen by professional portfolio managers who choose and monitor the investments, saving investors time and effort.

Differences Between ETFs and Mutual Funds:

One of the main differences between ETFs and mutual funds is how they are traded. ETFs trade like stocks and can be bought and sold on a stock exchange throughout the day, resulting in price changes throughout the day. On the other hand, mutual fund orders are executed once per day, and all investors who buy or sell that day receive the same price.

Another difference lies in the minimum investment requirements. ETFs do not require a minimum initial investment and can be purchased as whole shares, whereas mutual funds typically have a flat dollar amount as a minimum investment, which is not based on the fund's share price.

ETFs also offer more hands-on control over the price of the trade, as they provide real-time pricing and allow for more sophisticated order types. Mutual funds, on the other hand, offer a simpler approach, as investors will get the best current price without the added complexity.

Additionally, ETFs cannot accommodate automatic investments or withdrawals, whereas mutual funds allow investors to set up automatic transactions based on their preferences.

In terms of taxation, ETFs can potentially generate fewer capital gains for investors due to their lower turnover and ability to use the in-kind creation/redemption process. In contrast, a sale of securities within a mutual fund may trigger capital gains for shareholders, even if they have an unrealized loss on the overall investment.

Finally, ETFs are usually passively managed, meaning they track a market index or sector sub-index, while mutual funds are typically actively managed, with fund managers making decisions about how to allocate assets. As a result, ETFs tend to have lower fees and expense ratios compared to actively managed mutual funds.

ETF advantages and disadvantages

Exchange-traded funds (ETFs) are an increasingly popular investment option, offering a range of benefits to investors. Here are some of the advantages and disadvantages of ETFs:

Advantages of ETFs:

• Diversification and Risk Management: ETFs provide an efficient way to diversify your investment portfolio without the need to select individual stocks or bonds. They cover a wide range of asset classes, sectors, and industries, both domestically and internationally. This diversification helps to reduce overall investment risk.
• Low Costs: ETFs generally have lower operating costs compared to traditional open-end funds or actively managed mutual funds. They also tend to have lower expense ratios, as they are passively managed and do not incur certain fees such as the 12b-1 marketing fee.
• Trading Flexibility: ETFs offer flexible trading as they are bought and sold during market hours, providing continuous pricing throughout the day. This allows for easy movement of money between different asset classes.
• Tax Efficiency: ETFs are more tax-efficient than mutual funds due to their structural differences. They typically incur lower capital gains taxes, which are only realised upon the sale of the ETF by the investor.
• Transparency: Most ETFs disclose their holdings on a daily basis, providing greater transparency to investors.

Disadvantages of ETFs:

• Limited Diversification: In certain sectors or for foreign stocks, ETF investors may be restricted to large-cap stocks due to a limited number of equities in the market index. This could result in missed growth opportunities from mid- and small-cap companies.
• Intraday Pricing and Emotional Trading: Intraday pricing fluctuations could lead to unnecessary trading, especially for longer-term investors. Emotional responses to short-term price swings may distort investment objectives.
• Higher Costs for Certain Investments: While ETFs generally have lower costs compared to funds, they may have higher costs when compared to investing in specific stocks, as there is no management fee for individual stocks.
• Lower Dividend Yields: While there are dividend-paying ETFs, the yields may be lower than those obtained by owning high-yielding individual stocks. Taking on the higher risk of individual stocks can potentially result in much higher dividend yields.
• Shutdown Risk: ETFs carry the minor risk of shutting down, which can lead to inconveniences such as unexpected capital gains taxes and fees.

Frequently asked questions