Exchange-traded is like a mutual fund that can be bought and sold like a stock. It stands for a group of stocks that make up an index. The return on indexes is what the ETFs try to copy, but there is no guarantee that they will do it exactly. But an ETF is not a mutual fund, and it trades on a stock exchange like any other company. The price of an ETF can change all day long depending on supply and demand, while mutual funds are only traded once a day. For mutual funds to trade, NAV must also be calculated. The cost is another way that mutual funds and ETFs are different. The cost of mutual funds is higher than that of mutual funds. The assets in an ETF are not watched by a portfolio manager, so there are no fees. So, when people invest in ETFs, they can put more of their money into real investments.
ETFs offer a lot of different ways to invest, and the major market indexes are just one of them. You can add to your main investments with more specialised ETFs, which give you access to a wide range of investment opportunities. ETFs are now trying to track indexes in almost every area, including biotechnology, healthcare, gold, and more. By adding ETFs to your asset allocation, you give your asset allocation a strong boost. You can always use active trading techniques with ETFs. For example, if you own a stock that you think might fall and gold is about to go up, you can quickly trade out of the stock and into gold at any time of the trading day.
ETFs can be used for a number of different types of investments, such as commodities, switching between industries, stocks, and other investments that help diversify a portfolio. Most of these successful ways to invest in mutual funds also work well with ETF. One of these strategies or ways to invest is called "dollar-cost averaging."
The idea behind dollar-cost averaging is that by investing a set amount of money at regular intervals, the investor will buy fewer shares when prices are high but more when prices go down. Lastly, this will cause the average value per share to keep going down. Dollar-cost averaging is an old way to invest that keeps people from putting in large amounts of money at the wrong time. Dollar-cost averaging involves making a small number of investments, so it works well when the costs of making those investments are low. Dollar-cost averaging is a strategy that most mutual fund investors use, even though the costs of buying and selling mutual funds are high. So it's clear that dollar-cost averaging would work even better if ETFs had a low expense ratio.
The dollar-cost-averaging theory isn't just about making small investments over and over again. What matters is making stable investments at regular times. Dollar-cost averaging should still work as long as the investor keeps buying shares with the same amount of money each time. Over time, the average price per share should go down. Because ETFs have transaction costs, smaller investments are not a good idea because they make it harder to execute investments. Now, ETF owners who want to use the dollar-cost-averaging strategy have two likely options. They can save up money and buy shares once or twice a year, or they can make bigger investments more often but less often. The dollar-cost-averaging strategy is a clear winner, and ETF owners can use it well if they invest larger amounts of money on a regular basis. Dollar-cost averaging works well with ETFs, even when the amounts invested are the same and the intervals are set.
All rights reserved. Copyright (c) 2007 Joel Teo. (You may publish this whole article as long as you include the following author's name and only live links.)
