Can ETFs be considered as long-term investment vehicles? They are highly convenient to invest in and can help you consistently grow your returns, but can you use them as part of a long-term investment plan? Read on to know more.
How do ETF investments work?
Exchange-traded funds or ETFs are baskets of investments that can be bought and sold on stock markets like stocks. They can be structured to track the prices of commodities or a varied collection of securities. The assets underlying an ETF are owned by the fund provider who then offers the shares in that fund to investors via the ETF. Shareholders of the ETF, however, own a part of the ETF and not the fund’s assets. An ETF provider considers various assets including stocks, bonds, commodities like gold, and currencies and builds a basket of these securities while offering an ETF.
Are ETFs good as a long-term investment?
ETFs offer you certain key benefits that help you generate long-term wealth:
- ETFs help you diversify your investment portfolio: Financial advisors stress on the importance of a diversified portfolio to mitigate risks and consistently grow returns. ETFs help you do the same by helping you reduce stock-specific risks as they distribute your investing risk across several securities.
- ETFs are affordable investments: Buying all the stocks in an ETF portfolio individually would cost you a lot more than buying an ETF. Therefore, ETFs also provide the benefit of affordability.
- Investing in ETFs is extremely convenient: You can buy and sell an ETF at any hour of a trading day. ETFs can also be used for intraday trading.
- ETFs can be traded like stocks: You can trade ETFs like stocks during trading hours. ETF prices fluctuate during regular trading hours.
- They offer high liquidity: You can buy, sell, and trade ETFs during a trading day unlike mutual funds. ETFs also permit intraday trading which helps you rapidly convert your investments into cash for better liquidity.
Steps to create a long-term ETF investment strategy
If you wish to invest in ETFs with a long-term investment strategy in mind, here are the steps that you must follow:
- Note down your investment goals: You must have a clear idea of your financial goals before starting out. Assign an investment horizon to your goal and note an estimate of the returns that you wish to generate at the end of the investment horizon.
- Assess your risk tolerance and decide on an investment amount: Next, you must assess your risk-taking capacity. Doing so will help you select the right exchange-traded fund for a long-term investment.
- Choose your ETF asset mix: Do you wish to invest in gold ETFs, bonds, or sector ETFs? You must consider the various types of ETFs available online at this stage. If a particular sector seems worthy of investment, you should consider investing in it after researching well or consulting a financial advisor.
- Research various ETFs online and compare their features: You can find the details of various ETFs online and compare them for yourself. While creating a shortlist of ETFs, you must also consider the expenses involved with investing in these ETFs. Be sure to compare the features of the ETFs you shortlist.
- Choose one ETF and invest in it: Next, you must choose one ETF based on your research and invest in it. Check if this ETF aligns with the investment objectives you defined in the first step.
- Regularly assess your ETF investment: You must keep assessing your ETF investments to check if they align with your investment goals.
ETFs can certainly be used as long-term investments. Their affordability and the convenience that they offer investors make them efficient long-term investment options.