Exchange Traded Funds (ETFs) Offer Flexible
Investment Approaches
by Shane
Flait, ©2011
Exchange Traded Funds (ETFs) offer low expense
ratios and high trading flexibility. That makes
them attractive alternatives to traditional
mutual funds. And they can serve as part of both
long-term and short-term investment strategy.
Here’s the scoop…
ETFs trade intraday just like a stock – unlike
mutual funds. You can buy them long or sell
short; use them in hedge strategies, and buy
them on margin. If you can think of a strategy
that can be implemented with a stock or bond,
that strategy can be applied with an ETF - but
instead of trading the stock or bond issued by a
single company, you’re trading an entire market
or market segment. That’s what makes them
flexible.
ETF Costs
Though ETF fees may be less than most mutual
funds, some are higher. So check their fees
before you buy. Use the NASD Mutual Fund
Analyzer to compare the expenses of up to three
exchange traded funds, mutual funds or share
classes of the same mutual fund.
Be careful not to offset any ETF fee advantages
by accumulating commissions and other trading
costs if you trade them frequently. Trading
imposes commissions. But infrequent or high
volume trading can help keep commission costs at
a minimum.
Using ETF index funds as an investment strategy
You can choose ETFs that invest in broad-market
indexes. There are ETFs that mirror the S&P 500,
the Nasdaq 100, the Dow Industrials and about
every other major market index - on the equity
side. While on the fixed-income side, other ETFs
track long-term and short-term bond indexes
including the Lehman 1-to-3 Year Treasury, the
Lehman 20-Year Treasury and the Lehman Aggregate
Bond Index.
Owning only two or three ETFs, you can create a
broad and diverse portfolio that covers most of
equity market and much of the fixed-income
market. Then just stick to a buy-and-hold
strategy as you would with any other index
product.
Actively Managing ETFs
With ETFs you can create a broadly diversified
portfolio but choose to actively manage it
instead of just buying and holding a major ETF
indexes as is done in passive management.
Apart from broad market index-based ETFs, you
can buy ETFs targeted at a wide array of
small-cap, sector, commodity, international,
emerging market, and other investing
opportunities. ETFs track indexes in just about
every area, including biotechnology, healthcare,
REITs, gold, Japan, and more.
You might add one or more of these targeted ETFs
to your broad market ETFs as an aggressive
addition to a conservative portfolio. Then, you
can buy and hold it to create a long-term
portfolio or trade more actively. As an example,
if biotechnology is set to fall and while gold
should rise, trade out of your biotech position
and into gold in a matter of moments at any time
during the trading day.
ETF offer a range of investment strategies and
flexibility that’s unique to them. Perhaps they
offer an approach to investing you’re looking
for.
