Is it OK to just invest in ETFs?
ETFs can be safe investments if used correctly, offering diversification and flexibility. Indexed ETFs, tracking specific indexes like the S&P 500, are generally safe and tend to gain value over time. Leveraged ETFs can be used to amplify returns, but they can be riskier due to increased volatility.
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.
ETFs can be a great investment for long-term investors and those with shorter-term time horizons. They can be especially valuable to beginning investors. That's because they won't require the time, effort, and experience needed to research individual stocks.
At any given time, the spread on an ETF may be high, and the market price of shares may not correspond to the intraday value of the underlying securities. Those are not good times to transact business. Make sure you know what an ETF's current intraday value is as well as the market price of the shares before you buy.
Key Takeaways
ETFs are less risky than individual stocks because they are diversified funds. Their investors also benefit from very low fees. Still, there are unique risks to some ETFs, including a lack of diversification and tax exposure.
For instance, some ETFs may come with fees, others might stray from the value of the underlying asset, ETFs are not always optimized for taxes, and of course — like any investment — ETFs also come with risk.
ETFs offer advantages over stocks in two situations. First, when the return from stocks in the sector has a narrow dispersion around the mean, an ETF might be the best choice. Second, if you are unable to gain an advantage through knowledge of the company, an ETF is your best choice.
Hold ETFs throughout your working life. Hold ETFs as long as you can, give compound interest time to work for you. Sell ETFs to fund your retirement. Don't sell ETFs during a market crash.
For most standard, unleveraged ETFs that track an index, the maximum you can theoretically lose is the amount you invested, driving your investment value to zero. However, it's rare for broad-market ETFs to go to zero unless the entire market or sector it tracks collapses entirely.
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.
Has an ETF ever failed?
In fact, 47% of all such funds have closed down, compared with a closure rate of 28% for nonleveraged, noninverse ETFs. "Leveraged and inverse funds generally aren't meant to be held for longer than a day, and some types of leveraged and inverse ETFs tend to lose the majority of their value over time," Emily says.
Liquidation of ETFs is strictly regulated; when an ETF closes, any remaining shareholders will receive a payout based on what they had invested in the ETF.
The low investment threshold for most ETFs makes it easy for a beginner to implement a basic asset allocation strategy that matches their investment time horizon and risk tolerance. For example, young investors might be 100% invested in equity ETFs when they are in their 20s.
For most personal investors, an optimal number of ETFs to hold would be 5 to 10 across asset classes, geographies, and other characteristics.
- Vanguard S&P 500 ETF (VOO)
- Schwab U.S. Small-Cap ETF (SCHA)
- Invesco QQQ Trust (QQQ)
- Vanguard High Dividend Yield Index ETF (VYM)
- Vanguard Total International Stock ETF (VXUS)
- Vanguard Total World Stock ETF (VT)
- iShares Core U.S. Aggregate Bond ETF (AGG)
- High-yield savings accounts.
- Money market funds.
- Short-term certificates of deposit.
- Series I savings bonds.
- Treasury bills, notes, bonds and TIPS.
- Corporate bonds.
- Dividend-paying stocks.
- Preferred stocks.
Yes, you could. The underlying assets owned by the ETF could become worthless. Literally worthless is not likely, but the ETF will change in value as the underlying portfolio. An ETF does not go up in price when bought like a stock.
The choice comes down to what you value most. If you prefer the flexibility of trading intraday and favor lower expense ratios in most instances, go with ETFs. If you worry about the impact of commissions and spreads, go with mutual funds.
In contrast, the riskiest ETF in the Morningstar database, ProShares Ultra VIX Short-term Futures Fund (UVXY), has a three-year standard deviation of 132.9. The fund, of course, doesn't invest in stocks. It invests in volatility itself, as measured by the so-called Fear Index: The short-term CBOE VIX index.
- Invesco QQQ Trust (QQQ)
- Vanguard Information Technology ETF (VGT)
- Invesco AI and Next Gen Software ETF (IGPT)
- MicroSectors FANG+ Index 3X Leveraged ETN (FNGU)
- Vanguard U.S. Quality Factor ETF (VFQY)
- WisdomTree Japan Hedged Equity Fund (DXJ)
Who should invest in ETFs?
ETFs are good for beginners because they offer entry-level access: You can buy as little as a single share, and with some brokers, like Robinhood, you can even buy fractional shares. Fees vary by broker, but it's best to look for options with very low or no transaction costs.
Finding the best long-term ETFs can help reward you if you buy and hold, allowing you to compound your money over time. Even small differences in returns, just a few percent annually, can create an amazing improvement in your total wealth.
It's relatively simple: You add up all of your investments, and withdraw 4% of that total during your first year of retirement. In subsequent years, you adjust the dollar amount you withdraw to account for inflation.
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.
ETFs are investment funds that track the performance of a specific index – like the STI Index or S&P 500. Just like stocks, you can trade ETFs on a stock exchange at any point during market hours.
References
- https://www.cnbc.com/select/what-are-etfs-should-you-invest/
- https://www.investopedia.com/articles/exchangetradedfunds/09/etf-out-of-business.asp
- https://www.investopedia.com/terms/e/exchange-fund.asp
- https://www.nerdwallet.com/article/investing/exchange-fund
- https://www.dividendmax.com/united-states/nyse-arca/unknown/simplify-exchange-traded-funds-simplify-volatility-premium-etf/dividends
- https://www.investopedia.com/articles/investing/121515/why-3x-etfs-are-riskier-you-think.asp
- https://www.lawinsider.com/dictionary/payout-date
- https://www.investopedia.com/articles/investing/090115/7-best-etf-trading-strategies-beginners.asp
- https://stockanalysis.com/etf/tltw/dividend/
- https://www.fool.com/investing/how-to-invest/etfs/
- https://smartasset.com/investing/investing-200-a-month-how-much-will-you-make
- https://www.bloomberg.com/news/articles/2024-02-12/us-stock-market-volatility-bets-trigger-fears-like-volmageddon
- https://curvo.eu/article/etf-risk
- https://www.fidelity.com/learning-center/investment-products/etf/benefits-of-etfs
- https://www.physiciansidegigs.com/three-fund-portfolio
- https://guides.pm-research.com/content/iijetfind/2009/1/144
- https://www.quora.com/I-want-to-earn-1-000-USD-every-month-from-dividends-How-much-do-I-have-to-invest-and-where
- https://www.fool.com/investing/general/2013/09/21/the-best-performing-stock-on-the-sp-500-since-1980.aspx
- https://time.com/personal-finance/article/how-to-invest-in-index-funds/
- https://www.robomarkets.com/blog/stock-market/top-stocks/top-10-monthly-dividend-stocks/
- https://www.investopedia.com/articles/etfs-mutual-funds/061416/biggest-etf-risks.asp
- https://www.fidelity.com/learning-center/investment-products/etf/which-is-right-for-you
- https://www.fidelity.com/learning-center/investment-products/etf/drawbacks-of-etfs
- https://www.tipranks.com/etf/spyi/forecast
- https://www.investopedia.com/articles/mutualfund/07/etf_downside.asp
- https://www.investopedia.com/investing/dangers-over-diversifying-your-portfolio/
- https://www.bankrate.com/investing/low-risk-investments/
- https://www.forbes.com/advisor/investing/how-to-buy-etfs/
- https://etfdb.com/compare/highest-5-year-returns/
- https://www.morningstar.com/portfolios/model-portfolios-vanguard-investors
- https://www.investopedia.com/articles/exchangetradedfunds/11/advantages-disadvantages-etfs.asp
- https://seekingalpha.com/article/4636377-svol-the-best-income-etf-on-the-market-sells-vix-futures
- https://www.justetf.com/en/academy/is-it-possible-to-invest-in-omly-one-etf.html
- https://www.investopedia.com/financial-edge/0113/7-easy-to-understand-etfs-to-replace-a-savings-account.aspx
- https://www.getsmarteraboutmoney.ca/learning-path/etfs/how-exchange-traded-funds-etfs-work/
- https://walletinvestor.com/stock-forecast/svol-stock-prediction
- https://stockinvest.us/stock/SVOL
- https://www.bankrate.com/investing/best-long-term-etfs-to-buy-and-hold/
- https://www.investopedia.com/why-bond-etfs-go-down-8303231
- https://www.canstar.com.au/investor-hub/buy-sell-hold-etfs/
- https://www.tipranks.com/etf/svol/holdings
- https://seekingalpha.com/article/4616674-svol-market-risk-perception-too-low-compared-to-economic-reality
- https://www.trackinsight.com/en/education/how-many-etfs-should-you-own
- https://groww.in/blog/how-many-mutual-funds-invest
- https://www.investopedia.com/ask/answers/033015/whats-difference-between-index-fund-and-etf.asp
- https://www.schwab.com/research/etfs/quotes/summary/svol
- https://stockanalysis.com/etf/jepi/holdings/
- https://www.quora.com/Can-you-lose-all-your-money-from-investing-in-ETFs-even-if-you-dont-sell-your-position
- https://www.marketwatch.com/investing/fund/qqqm/holdings
- https://markets.businessinsider.com/news/funds/stock-market-sp500-4x-leveraged-xxxx-fund-retail-traders-returns-2023-12
- https://www.nerdwallet.com/article/investing/how-to-invest-dividend-stocks
- https://www.investopedia.com/terms/e/exchange-fees.asp
- https://www.nasdaq.com/market-activity/etf/svol
- https://www.fool.com/terms/o/over-diversification/
- https://www.bankrate.com/investing/stocks-vs-etfs/
- https://www.forbes.com/sites/jonmarkman/2023/12/12/unlock-stock-gains-safely-simplify-volatility-with-svol/
- https://www.commbank.com.au/articles/investing/investing-in-etfs.html
- https://www.thestreet.com/etffocus/trade-ideas/the-only-leveraged-etf-that-i-would-buy-hold-long-term
- https://www.td.com/content/dam/wealth/document/pdf/direct-investing/how-etfs-are-taxed-en.pdf
- https://www.nasdaq.com/market-activity/etf/svol/dividend-history
- https://www.dummies.com/article/business-careers-money/personal-finance/investing/investment-vehicles/funds/exchange-traded-funds-for-dummies-cheat-sheet-208448/
- https://www.quora.com/How-many-ETFs-are-too-many
- https://www.simplify.us/etfs/svol-simplify-volatility-premium-etf
- https://www.tipranks.com/etf/svol/dividends
- https://www.schwab.com/etfs/mutual-funds-vs-etfs
- https://curvo.eu/article/build-portfolio-etf
- https://public.com/stocks/svol
- https://talkmarkets.com/content/how-much-money-do-i-need-to-invest-to-make-3000-a-month?post=431352
- https://whalewisdom.com/filer/softbank-corp
- https://www.simplify.us/sites/default/files/etfs/factsheet/2023-10/SVOL-Fact-Sheet-3Q23.pdf
- https://investor.vanguard.com/investment-products/etfs/profile/voo
- https://www.nerdwallet.com/article/investing/what-is-an-etf
- https://www.barrons.com/articles/are-3-funds-better-than-1-best-strategy-for-total-u-s-stock-market-exposure-51623432396
- https://www.titan.com/articles/etf-drawbacks
- https://www.investopedia.com/articles/exchangetradedfunds/08/etf-taxes-introduction.asp
- https://www.investopedia.com/articles/stocks/09/buying-stock-or-etf.asp
- https://money.usnews.com/investing/articles/best-etfs-to-buy
- https://www.nerdwallet.com/article/investing/sp-500-etfs
- https://www.smartaboutmoney.co.za/saving-and-investing/exchange-traded-funds/how-quickly-can-i-get-my-money-out-of-an-etf/
- https://www.etf.com/sections/etf-basics/best-etfs-beginners-complete-guide
- https://investor.vanguard.com/investor-resources-education/taxes/how-mutual-funds-etfs-are-taxed
- https://www.tipranks.com/stocks/bngo/forecast
- https://www.fool.com/retirement/how-much-saved-by-25/
- https://finance.yahoo.com/quote/SVOL/holdings/
- https://advisor.morganstanley.com/s.mark.alton/documents/field/a/al/alton-s-mark/Exchange_Funds__an_Important_Alternative_for_Your_Asset_Allocation.pdf
- https://www.franklintempleton.com/planning-and-learning/learn-about-investing/investing-principles/cost-of-timing-the-market
- https://www.investopedia.com/articles/exchangetradedfunds/11/building-an-etf-portfolio.asp
- https://www.investopedia.com/3-fund-portfolio-401k-5409269
- https://www.schwab.com/learn/story/what-happens-if-your-etf-closes
- https://wealthdesk.in/blog/are-etfs-good-for-long-term-investing/
- https://www.blackrock.com/sg/en/ishares/education/what-is-an-etf
- https://www.investmentnews.com/industry-news/news/think-your-stock-fund-is-risky-try-these-etfs-66496
- https://stockanalysis.com/etf/svol/dividend/
- https://finance.yahoo.com/news/turn-100-000-investment-1-161238030.html
- https://money.usnews.com/investing/articles/best-etfs-to-buy-for-long-term-investors
- https://www.wsj.com/market-data/quotes/SMFL/research-ratings
- https://www.bankrate.com/investing/alpha-vs-beta-stocks/
- https://m.economictimes.com/markets/stocks/news/the-optimal-number-of-mutual-funds-that-you-should-hold-in-your-portfolio/articleshow/99009145.cms
- https://www.fidelity.com/learning-center/investment-products/etf/risks-with-etfs
- https://www.schwab.com/learn/story/beyond-4-rule-how-much-can-you-spend-retirement
- https://money.usnews.com/investing/articles/best-monthly-dividend-stocks-to-buy-now
- https://www.thestreet.com/etffocus/high-yield-ideas/svol-how-exactly-does-advanced-high-yield-income-etf-work
- https://www.schwab.com/learn/story/generating-income-with-etfs-what-you-need-to-know
- https://www.investmentfundlawblog.com/resources/investments-by-funds/investments-investment-companies/
- https://money.usnews.com/money/retirement/articles/how-can-i-earn-100-200-or-500-per-month-in-guaranteed-income-in-retirement
- https://stockanalysis.com/etf/qqq/dividend/