Exchange-traded funds (ETFs) are currently the hot topic in the financial services industry and it is not without reason because this investment group recently reached a milestone. CNBC.com reported that the past 12 months have seen investors put more money into ETFs than mutual funds and this has never happened before. ETFs are not exactly a “one-hit-wonder” because they have been around since the early 1990s but investors should still be cautious before making a decision.
What is an ETF?
Investopedia states that ETFs represent “a basket of stocks that reflect an index such as the S&P 500.” The investment is spread out over multiple options instead of one single thing. As an example, it is similar to buying a bunch of grapes rather than one apple or one banana.
For assistance with navigating the world of ETFs, we tapped the expertise of our Managing Director Eric McMullen who leads the Canter Strategic Wealth Management division. He has more than 20 years of experience in the financial services industry and Eric has a long history of utilizing ETFs within his overall investment strategy. Here are five tips from Eric for making ETFs work as the next tool for your investment portfolio.
Tip #1: Understand that an ETF typically tracks as an index and NOT a mutual fund
Mutual funds are a pool of investments collected from multiple investors and they are operated by money managers who make active decisions where and how to invest. An ETF is not a mutual fund.
ETFs are passive investments because they are not controlled by a money manager and they are a bulk investment into a group of options that often include indexes like the S&P 500.
Tip #2: Know what index you are buying and why you are buying it
ETFs are not an instant cure for portfolio diversification. This type of investment is passive and generally takes time to produce results.
Tip #3: Understand that ETFs trade like a stock, not like a mutual fund
Prices for ETFs change throughout the day because they are bought and sold like stocks. This is in contrast to mutual funds that experience price changes only once per day.
Tip #4: Use ETFs as one of the multiple investment tools in your overall strategy
ETFs should be one part of the overall investment strategy for a portfolio that includes a number of different options. Be meticulous with your investments and set goals for each that include parameters around buying and selling.
Tip #5: Just like all investments, don’t chase return
You don’t necessarily need to invest in an ETF when you hear that it is doing well. Treat ETFs like your other investments and leave emotion out of the decision-making process. Don’t jump in if it doesn’t meet your investment goal.
Adding exchange-traded funds to your portfolio is an excellent step towards sound strategic wealth management but it requires research and due diligence. The earlier you can invest the better because the only thing more valuable than money is time.
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