In an ideal world investing with exchange traded funds would be a buy and hold strategy. If you believe, for example, that the US economy will get back on its feet and that US oil production will increase, investing with exchange traded funds in the oil sector might be profitable. Unfortunately, economic recovery after the worst economic recession in three quarters of a century has been slow. Many believe that the days of buy and hold investing are long gone. On the other hand there are firm believers in the value of picking individual stocks based on sound fundamental analysis and good market timing. Investors with an eye for intrinsic stock value and a margin of safety have been making money for years. But does this approach work for investing with exchange traded funds? The approach might work if an entire sector is likely to rise in value and stay strong.
Advantages of Investing with Exchange Traded Funds
Excellent reasons to use exchange traded funds include low expense ratios, tax efficiency, automatic diversification, and ease of entry and exit equal to stock investing. Investors may choose investing with exchange traded funds and avoid mutual funds. ETFs often outperform mutual funds and they are cheaper to enter and leave. Additionally, investors can pick ETFs that track various sectors instead of the broader market or international indexes specific to countries or regions. In our article about three good offshore investment ideas we lean heavily towards Latin America. Investing in exchange traded funds based on stocks from that region could be a profitable and easy approach to putting part of your portfolio to work in an economically growing region.
You Can See What They Are Doing
Standard exchange traded funds are transparent. They are priced at intervals during the day. The fund declares what mix of stocks it is seeking to track and buys or sells shares accordingly to maintain the required balance. When investing in exchange traded funds the investor knows what mix of equities he has on almost an hour by hour basis. Unlike with mutual funds an investor can exit when he wants to and without penalty if he has issues with fund management.
Where Is Your Sector Headed?
Growth issues are probably most important when investing in exchange traded funds. A long term investor with hopes for a comfortable retirement will commonly want to put part of his funds into a buy and hold situation. He will do this after giving thought to what the sector in question is going to do for the next several years. This is common with offshore investments in growing markets. On the other hand no one should ever invest and walk away. If your initial hopes for an Asia based stock fund do not pan out it may be time to sell and walk away. Investing with exchange traded funds can be cheap and profitable but the best results are always when you keep your eye on fundamentals as well as market sentiment using technical analysis.