Exchange-traded funds have become a popular investment over the past ten years, with many investors using them to build their portfolios. These investments are easy to use and can be extremely useful when conducted with other financial transactions. However, do they provide too much simplicity to mask bad investing practices?
Before we discuss whether or not ETF’s make for suitable investments, it is essential to understand what exactly an ETF is and how it works. An Exchange Traded Fund (ETF) is a collection of assets such as stocks that you can trade during regular market hours like any common stock on either an exchange or over-the-counter (OTC). It represents value and is bought or sold on the open market.
What are the benefits of investing in ETFs over other traditional investments?
One of the main benefits of buying shares within an ETF is that it offers diversification to investors who do not have a large amount of capital to invest, which would be needed to buy several individual stocks. It has also been argued that you could save yourself money by making this investment.
It’s because these funds are often passively managed, therefore lowering your overall costs. There will be no need for constant research into multiple companies since one fund holds many different stocks. Although these funds are passively managed, this does not mean that they cannot outperform actively managed mutual funds.
ETFs can be very beneficial to new investors, especially when trying to figure out where to start. With many brokerages offering these types of funds at no charge for trades and certain financial institutions even having them available in your retirement accounts, all you need is the money to make it work.
What could go wrong if ETFs were not approached correctly?
It would seem like ETFs are very beginner-friendly, but let’s look at what could go wrong if they were not approached correctly.
One of the main issues that have been brought up within discussions about whether or not ETFs are beginner-friendly is that they provide too much simplicity, which may prevent an investor from adequately managing their portfolio without receiving adequate education along the way. This simplification can mask bad investment practices such as buying high and selling low by making it seem like a no-brainer.
Another issue that has been brought up is the fees associated with ETFs. Although there are free trades in most brokerage accounts, you will still be charged a fee per purchase and sale of these funds, which can end up costing you money in the long run if they’re not managed correctly. It isn’t necessarily an issue that could lead to wrong investment practices, but it should be mentioned since it complicates matters when managing your portfolio.
Research all options
As always, before making an investment decision, research into all options available since this may take more time than just picking the first option that seems right for you. It is essential to understand what you are getting yourself into before jumping headfirst into anything, so make sure you do your research before making any final decisions.
So are ETFs beginner friendly?
With financial markets becoming more accessible to casual investors over the past decade, Exchange Traded Funds have become a popular investment among people looking for an easy entry point into the market.
These funds are made up of stocks within various industries traded during regular market hours, just like common stock. Although these investments are great for casual investors or those just looking to get started with their portfolio, it has been discussed whether they provide too much simplicity.
One significant advantage you have when starting with investing is time on your side. It means you can put the research in now to find the best investment options later down the line. With that said, most people are not up for doing hours of research every week to decide where their money will go.