Question

Explain why an ETF fund would be suitable for long term investments and why woukd an ETF fund not be suitable for ling term investing. Include examples

Answer 1

The ETF (Exchange Traded Fund):

The ETF seems like it was created for those active traders that like the way mutual funds perform, but they hated the way they traded.

Liquidity: The ETF is very liquid. It trades like a regular, single stock. Whereas, a mutual fund can only be traded once a day. If you sell a mutual fund, you get the price that it ends in at the end of the day. Active traders that trade on a margin or short sell like the ETF and the way its liquidity.

Costs: ETFs have considerable trading costs. You’re paying a commission every time you trade the ETF. The cost of trading ETFs has typically been considered one of its downfalls.

Rate of Return: ETFs have gained a lot of popularity and there are some out there that perform very well. However, they don’t boast much higher returns than growth stock mutual funds.

An ETF is a type of fund that holds multiple underlying assets, rather than only one like a stock. Because there are multiple assets within an ETF, they can be a popular choice for diversification.

An ETF can own hundreds or thousands of stocks across various industries, or it could be isolated to one particular industry or sector. Some funds focus on only U.S. offerings, while others have a global outlook. For example, banking-focused ETFs would contain stocks of various banks across the industry.

Types of ETFs

There are various types of ETFs available to investors that can be used for income generation, speculation, price increases, and to hedge or partly offset risk in an investor's portfolio. Below are several examples of the types of ETFs.

• Bond ETFs might include government bonds, corporate bonds, and state and local bonds—called municipal bonds.
• Industry ETFs track a particular industry such as technology, banking, or the oil and gas sector.
• Commodity ETFs invest in commodities including crude oil or gold.
• Currency ETFs invest in foreign currencies such as the Euro or Canadian dollar.
• Inverse ETFs attempt to earn gains from stock declines by shorting stocks. Shorting is selling a stock, expecting a decline in value, and repurchasing it at a lower price.

Investors should be aware that many inverse ETFs are Exchange Traded Notes (ETNs) and not true ETFs. An ETN is a bond but trades like a stock and is backed by an issuer like a bank. Be sure to check with your broker to determine if an ETN is a right fit for your portfolio.

Advantages and Disadvantages of ETFs

ETFs provide lower average costs since it would be expensive for an investor to buy all the stocks held in an ETF portfolio individually. Investors only need to execute one transaction to buy and one transaction to sell, which leads to fewer broker commissions since there are only a few trades being done by investors. Brokers typically charge a commission for each trade. Some brokers even offer no-commission trading on certain low-cost ETFs reducing costs for investors even further.

An ETF's expense ratio is the cost to operate and manage the fund. ETFs typically have low expenses since they track an index. For example, if an ETF tracks the S&P 500 index, it might contain all 500 stocks from the S&P making it a passively-managed fund and less time-intensive. However, not all ETFs track an index in a passive manner.

Pros

• Access to many stocks across various industries

• Low expense ratios and fewer broker commissions.

• Risk management through diversification

• ETFs exist that focus on targeted industries

Cons

• Actively-managed ETFs have higher fees

• Single industry focus ETFs limit diversification

• Lack of liquidity hinders transactions

Real World Examples of ETFs

Below are examples of popular ETFs on the market today. Some ETFs track an index of stocks creating a broad portfolio while others target specific industries.

• SPDR S&P 500 (SPY): The oldest surviving and most widely known ETF tracks the S&P 500 Index
• iShares Russell 2000 (IWM): Tracks the Russell 2000 small-cap index
• Invesco QQQ (QQQ): Indexes the Nasdaq 100, which typically contains technology stocks
• SPDR Dow Jones Industrial Average (DIA): Represents the 30 stocks of the Dow Jones Industrial Average
• Sector ETFs: Track individual industries such as oil (OIH), energy (XLE), financial services (XLF), REITs (IYR), Biotech (BBH)
• Commodity ETFs: Represent commodity markets including crude oil (USO) and natural gas (UNG)
• Physically-Backed ETFs: The SPDR Gold Shares (GLD) and iShares Silver Trust (SLV) hold physical gold and silver bullion in the fund