Why Invest in ETFs? | Can you get rich from ETFs?
Running Time: 8 minutes
ETFs are an investment vehicle that provides Diversity, Flexibility, and Low Fees — Count me in!
In this video, I’ll take you through the top 7 reasons why ETFs can be a great investment vehicle for your portfolio. As a quick refresher – an ETF or an Exchange Traded Fund, is essentially a type of security that can be bought and sold just like a regular stock. The kicker, is that it is made up of a collection of preselected stocks, bonds, and commodities.
So instead of just buying into one company, by investing in an ETF you are really buying a mini-portfolio of partial shares in a number of different companies. This can help in diversifying your assets, minimizing risk, and lowering your overall costs.
Portfolio Diversification and Risk Management
Let’s begin with Benefit Number One – Portfolio Diversification. When it comes to investing, this old saying rings true, “You should never put all your eggs in one basket”. But then, where *should* you put your eggs?
Stocks, Bonds, Commodities, Currencies, Crypto — the types of securities you can invest in are endless. Not to mention, all the different sectors, industries, and different markets. This dizzying array of choices can leave any investor feeling overwhelmed as they try to balance a well-rounded portfolio. In contrast to actively-managed funds that come with high management fees, a number of services fees, sales and distribution costs and other expenses. This means ETFs offer passive fund management, which means more money saved.
This is where ETFs truly shine. Investors can quickly gain easy exposure to a range of different market segments or different companies within a specific market segment.
For example, if you think that the biotech sector is going to boom in the next few years but you’re not sure which company to back, why not invest in a biotech ETF and cover all your bases? Or, if you’re not really set on a specific sector and all you care about is growth – why not invest in an ETF that focuses on the fastest growing stocks?
By investing in ETF shares, you’re simply spreading your risk around. This way if one company underperforms or suddenly goes belly up, you have other interests to counteract it. With ETFs, you can easily balance your risk with a diversified portfolio.
Instead of placing multiple orders for different companies, when you invest in an ETF you only have to enter into one single transaction. Not only does this simplify the purchasing process, it also *lowers fees and commissions*. In the long run, it also streamlines operation costs such as monthly statements, notifications, and transfers that are no longer required. This is in contrast to actively-managed funds that come with high management fees, a number of service fees, sales and distribution costs as well as other expenses.
The ETF does charge a yearly fee, however. Think of these fees as your payment for the ETF portfolio managers. They’re the ones doing the thinking. They’re the ones choosing the best assets. Instead of YOU doing all the work like researching stocks, reading financial statements, and doing technical analysis, you can just sit back, relax, and let them do the work.
The average fee is usually less than 1% anyway, so why bother with all the work? According to Investopedia, in 2021, the average annual fee for a passively traded ETF is 0.13%. For actively traded ETFs it’s 0.66%. Not bad, right? What’s more intriguing is that some online firms charge zero for a limited number of trades made on your ETFs.
For every $1,000 you invest in an actively traded ETF, you only pay $6.60 once per year. Imagine that. Would you rather pay a professional portfolio manager, who has several degrees, and years of experience for $6.60, OR, do you want to do it all yourself? The choice is a no-brainer. Save your time and focus for the more important things in life.
Just like regular stocks, ETFs are bought and sold during the day, throughout market hours. There’s no lock-in or maturity period, where liquidity is generally high. This means investors can easily get in and out of investments as they please, while staying on top of market trends.
With mutual funds, you can’t do this. You can’t trade them in real-time like ETFs. That’s what makes ETFs kind of like stocks, but with the benefit of being a bundle of assets like mutual funds.
Want to switch between ETFs because you think the other one will be more profitable? Easy, just sell your current ETF and invest in the new one. Is the market being bearish and bringing down the profits with you? Easy, just sell your ETF like you would sell a stock.
With ETFs, you get this flexibility in trading with asset diversification that you won’t get in other financial products.
Are you more of a passive investor or an active investor? Do you want to pick and choose your specific sectors or do you just want to simply watch your investments grow? With ETFs, it doesn’t matter. You can be hands-on and select your different sectors or you can simply mimic a market index. The choice is yours. Manage your investment in either style or something in between.
Passively traded ETFs are fit for investors who prefer buy and hold strategy. Take note, being “passive” is not a negative term. It is a valid strategy, and most of the time they even perform better than their actively traded counterpart, especially when the market is unstable.
Actively traded ETFs are for investors that are not content with average returns. They want profits, and they want it NOW. They’re for those who want to play the “high risk, high reward” game.
If you’re the relaxed, chill, take it easy kind of investor, go with passive. But if you’re the go-getter, no pain no gain, “JUST DO IT!” kind, then the active ETF might be for you.
Whichever of these two kinds of ETFs you choose, you’re still a winner. Historical performance shows that both of these strategies had a positive return in the long run. As long as there’s no catastrophic event that will shake the markets in the future, like a global recession, you can rest easy knowing you invested in the right product.
The financial entities behind actively traded ETFs, are required to publish the list of assets in the fund daily. This keeps you up to date with the assets you hold and it also keeps the financial entities accountable to you. Other investment vehicles don’t have this requirement.
Having accountability gives retail investors like us the power to choose which ETFs agree the most with our investing strategy. You wouldn’t want to give someone your hard-earned money for investing, without knowing where they’re going to put it, right?
For example, you own shares of the “SPY” ETF, the oldest and most recognized ETF in the USA. You can go to sites like Yahoo Finance, Market Watch, or ETF.com and find the saying “Holdings” and check what’s inside the ETF. For SPY, you will see that their top 3 stock holdings are:
- Apple with 5.76%, Microsoft with 5.30%, and Amazon at 3.98%.
These values change every day. Their fund managers might decide one day to invest more in Energy stocks than Technology stocks, and you will know. It’s there for everyone to see. And that’s one of the beauties of ETF Stocks.
Unlike many mutual funds that distribute dividends annually. Most ETFs will drop dividend payments into your brokerage account every quarter, if not every month. Monthly payments instead of yearly? Yes, thank you!
This is possible if you invest in ETFs that own dividend-paying stocks. You have to go to financial websites, find out dividend-paying stocks, find ETFs that hold those stocks, and invest in that ETF. Alternatively, you can just search for dividend-paying ETFs, check out their terms and yields, and see how you can invest in them. Easy right?
I have an earlier video of ETF’s, and I ignored my own advice. ETF’s are a great way to invest your money for the long-term. I have another video pointing out my own top ETFs, link below, but even then, I am missing out on QYLD that holds a yield of 12.35% which is CRAZY! Go where the money is, boys and girls.
Benefit number seven is simplicity. ETFs are simple structures that are easy to understand and offer excellent value for investors. This simplicity has led to an outstanding pace of growth. In the US, ETFs currently account for about 40% of all assets under management. In Japan, this figure is closer to 70% and is only expected to rise even further.
You see, more and more investors choose the simplicity of ETFs. It’s a chore tracking 10 stocks at once. There’s a lot of graphs, a lot of numbers, a lot of news reading, and a lot of market timing. With ETFs, life is simple. It’s only one graph.
Let the professionals do the work. They know the market way better than you. Trust the process.
With diversification, lower fees, flexibility, different investment styles, accountability, quarterly dividends, and simplicity – ETFs are really one of the soundest investment vehicles around. I really hope you’ve found this video useful and it has sparked an interest in Exchange Traded Funds.
If you’re now convinced that ETFs should form part of your investment portfolio, check out my video down below, to see my picks for the ‘5 Best ETFs to Buy and Hold’.