Is it better to invest in stocks or ETF?
Because of their wide array of holdings, ETFs provide the benefits of diversification, including lower risk and less volatility, which often makes a fund safer to own than an individual stock. An ETF's return depends on what it's invested in. An ETF's return is the weighted average of all its holdings.
ETFs can be a great investment for long-term investors and those with shorter-term time horizons. They can be especially valuable to beginning investors. That's because they won't require the time, effort, and experience needed to research individual stocks.
Experts agree that for most personal investors, a portfolio comprising 5 to 10 ETFs is perfect in terms of diversification.
For instance, some ETFs may come with fees, others might stray from the value of the underlying asset, ETFs are not always optimized for taxes, and of course — like any investment — ETFs also come with risk.
ETFs can be safe investments if used correctly, offering diversification and flexibility. Indexed ETFs, tracking specific indexes like the S&P 500, are generally safe and tend to gain value over time. Leveraged ETFs can be used to amplify returns, but they can be riskier due to increased volatility.
ETFs are less risky than individual stocks because they are diversified funds. Their investors also benefit from very low fees.
ETFs are most often linked to a benchmarking index, meaning that they are often not designed to outperform that index. Investors looking for this type of outperformance (which also, of course, carries added risks) should perhaps look to other opportunities.
Pros: Returns can be higher than ETFs: Even though stocks are generally a riskier investment, the returns can be greater, especially if the company is growing quickly. Commission-free trading options: There are many commission-free options that allow you to trade stocks without spending an extra penny.
The flawed “only invest in S&P 500” approach
However, this strategy is not bulletproof. Simply put, only investing in the S&P 500 is not a wise strategy for the long-term intelligent investor because it ignores some fundamental principles of diversification and historical unpredictability.
How many ETFs should I own as a beginner?
The majority of individual investors should, however, seek to hold 5 to 10 ETFs that are diverse in terms of asset classes, regions, and other factors. Investors can diversify their investment portfolio across several industries and asset classes while maintaining simplicity by buying 5 to 10 ETFs.
Holding an ETF for longer than a year may get you a more favorable capital gains tax rate when you sell your investment.
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SPY, VOO and IVV are among the most popular S&P 500 ETFs. These three S&P 500 ETFs are quite similar, but may sometimes diverge in terms of costs or daily returns. Investors generally only need one S&P 500 ETF.
Leveraged ETF prices tend to decay over time, and triple leverage will tend to decay at a faster rate than 2x leverage. As a result, they can tend toward zero.
Like any business, even low-cost ETFs need to generate revenue to cover their costs. Like any business, even low-cost ETFs need to generate revenue to cover their costs. Plenty of ETFs fail to garner the assets necessary to cover these costs and, consequently, ETF closures happen regularly.
If you own ETF shares, you will receive cash equivalent to the value of your holding on the day of liquidation (not the value on the last day of trading).
The Motley Fool has positions in and recommends Berkshire Hathaway, Nvidia, Realty Income, Vanguard S&P 500 ETF, Vanguard Specialized Funds-Vanguard Real Estate ETF, and Walt Disney.
The one time it's okay to choose a single investment
That's because your investment gives you access to the broad stock market. Meanwhile, if you only invest in S&P 500 ETFs, you won't beat the broad market. Rather, you can expect your portfolio's performance to be in line with that of the broad market.
Symbol | Name | 5-Year Return |
---|---|---|
PSI | Invesco Semiconductors ETF | 23.53% |
URA | Global X Uranium ETF | 23.43% |
XHB | SPDR S&P Homebuilders ETF | 21.93% |
XLK | Technology Select Sector SPDR Fund | 21.65% |
The low investment threshold for most ETFs makes it easy for a beginner to implement a basic asset allocation strategy that matches their investment time horizon and risk tolerance. For example, young investors might be 100% invested in equity ETFs when they are in their 20s.
How many ETFs should I own?
Generally speaking, fewer than 10 ETFs are likely enough to diversify your portfolio, but this will vary depending on your financial goals, ranging from retirement savings to income generation. When building a portfolio of ETFs, it is crucial to consider your investment strategy, objectives, and risk tolerance.
ETF | Assets Under Management | 10-Year Annualized Return |
---|---|---|
Vanguard S&P 500 ETF (ticker: VOO) | $435 billion | 12.9% |
Schwab U.S. Small-Cap ETF (SCHA) | $17 billion | 7.8% |
iShares Core S&P Mid-Cap ETF (IJH) | $85 billion | 9.9% |
Invesco QQQ Trust (QQQ) | $259 billion | 18.6% |
An ETF with a low risk rating can still lose money. ETFs do not provide any guarantees of future performance. As with any investment, you might not get back the money you invested.
An exchange-traded fund (ETF) is something of a cross between an index mutual fund and a stock. It's like a mutual fund but has some key differences you'll want to be sure you understand. Here, you discover how to get some ETFs into your portfolio, how to choose smart ETFs, and how ETFs differ from mutual funds.
ETFs do not involve actual ownership of securities. Mutual funds own the securities in their basket. Stocks involve physical ownership of the security. ETFs diversify risk by creating a portfolio that can span multiple asset classes, sectors, industries, and security instruments.
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