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Familiarize yourself with the many advantages, and potential disadvantages, of investing with ETFs. Find out if they fit your goals for goals for your investment portfolio |
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Exchange traded index funds offer numerous important benefits to the long-term portfolio investor, including the flexibility to fit into many different investment strategies. For example, with just one purchase of an exchange traded fund, you can own a portfolio that tracks the performance of the U.S. stock market. Or, you can build and rebalance a portfolio of broadly allocated assets according to your risk tolerance and investment goals.
Portfolio Building Blocks
There are over 100 exchange traded funds to choose from, including funds in a variety of categories and asset classes:
- Broad stock indexes (such as the S&P 500)
- Bonds and fixed-income
- Sectors (such as technology or healthcare)
- Company Size (large cap, mid cap, small cap)
- Style (value or growth)
- International (regions and countries)
Some ETFs involve more risks than others. No matter what type of ETF you choose, you should always consider your individual risk tolerance. For example, if you choose a sector specific ETF, your investment will be subject to the market risk normally associated with that sector. International investments involve special risks, including currency fluctuations and political and economic instability. Treasury Bills and Government Bonds are guaranteed by the U.S. Government and, if held to maturity, offer a fixed rate of return and fixed principal value. While, high-yield corporate bonds are subject to significant credit risks.
Own A Simple Stock Portfolio1
An ETF investor can purchase a single security and invest in the entire U.S. stock market by using one of the ETFs designed to track so-called "total market" indexes such as the Wilshire 5000 or the Russell 3000.
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Track the stock market with one trade |
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ETF |
Symbol |
Target Index |
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Vanguard Total Stock Market VIPERs |
VTI |
Wilshire 5000 Total Market Index |
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iShares Dow Jones US Total Market |
IYY |
Dow Jones US Total Market Index |
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iShares Russell 3000
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IWV |
Russell 3000 Index |
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Provided for illustrative purposes only and should not be considered a
recommendation or solicitation of any specific security. |
Fill a Portfolio Gap
Does your stock portfolio tend to be concentrated in certain kinds of stocks? If so, then ETFs can help round out your portfolio by filling in gaps. For example, perhaps you're a stock picker who prowls for strong future growth in smaller cap stocks. If so, then a core holding in a large cap ETF may provide important diversification. Or, if you find that your stock selections tend to focus on big, well known companies, then maybe an ETF that tracks a small or mid cap index will give you exposure to an area important for long-term growth. |
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Investment |
Front End Load |
Expense Ratio |
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ETF |
N/A |
0.11% |
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Index Mutual Fund |
N/A |
0.35% |
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No-load Actively Managed Fund |
N/A |
1.50% |
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Front-end load Actively Managed Fund |
5.75% |
1.50% |
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Provided for illustrative purposes only and should not be considered a recommendation or solicitation of any specific security. |
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Conclusion |
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This hypothetical illustration displays the effect of expenses on the overall return of similar investments. In the case of index vs. active management investing the effect can be significant. In this example owning the actively managed funds cost the investor more than $100,000 over the period. The illustration proves that the expense ratio can significantly erode the return of a portfolio over time and ultimately the ending value. |
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Clearly, some actively managed funds do manage to outperform the market over time but most managers cannot do that consistently. Many investors are confused by the myriad of choices available in funds and it is difficult to pick the right mutual fund. It may be a great fund in previous years, but it more than likely will be an under performing fund in future years. Index investing affords you the following benefits: |
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First Asia Investor
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