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Monday, May 25, 2009

ETFs as Long Term Investments

Exchange traded funds (ETFs) are very good instruments for long-term investments. They are especially important for investors who do not have much idea to screen the stocks, market timings and trends. Below are some factors which make ETFs good for long-term investments.
  1. Diversified trading instruments – with ETFs investors do not want to invest in more than two or three kinds/sectors of instruments. ETFs can be as much as diversified as a big stock exchange.
  2. Profiting from stock markets – studies shows that stock markets (in a long-term perspective) offer steady and high portfolio returns than most other financial markets. Estimated annual return is above 10% irrespective of the frequent ups and downs.
  3. ETF dividends – just like stocks, ETFs holders are also eligible for dividends. In fact there are many fixed income ETFs which offer monthly dividends.
  4. Can use covered calls – ETF holders can write options on their holdings to make additional profits or to hedge the holding risks.
  5. ETFs have low expense ratio – ETFs passively tracks market indexes and thus have low expense ratios. This makes them trade just like stocks.
  6. Can offer better returns than mutual funds – most mutual funds are underperformers than markets. But most ETFs perform same as markets.
There are a number of types of ETFs available which as a whole is not suitable for long-term trading. There are some highly active ETFs with high expense ratios which try to beat the market rather than going with the market. Thus one should choose the ETFs based on his portfolio goals and risk tolerance.

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posted by NobleTrading at 10:12 AM

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