Are ETFs good for long term investing?
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.
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.
- SPDR S&P 500 ETF Trust.
- iShares Core S&P 500 ETF.
- Schwab S&P 500 Index Fund.
- Shelton NASDAQ-100 Index Direct.
- Invesco QQQ Trust ETF.
- Vanguard Russell 2000 ETF.
- Vanguard Total Stock Market ETF.
- SPDR Dow Jones Industrial Average ETF Trust.
Hold ETFs throughout your working life. Hold ETFs as long as you can, give compound interest time to work for you. Sell ETFs to fund your retirement. Don't sell ETFs during a market crash.
Ticker | Fund | 10-Yr Return |
---|---|---|
VGT | Vanguard Information Technology ETF | 19.60% |
IYW | iShares U.S. Technology ETF | 19.58% |
IXN | iShares Global Tech ETF | 18.20% |
IGM | iShares Expanded Tech Sector ETF | 17.95% |
Low Liquidity
If an ETF is thinly traded, there can be problems getting out of the investment, depending on the size of your position relative to the average trading volume. The biggest sign of an illiquid investment is large spreads between the bid and the ask.
Market risk
The single biggest risk in ETFs is market risk. Like a mutual fund or a closed-end fund, ETFs are only an investment vehicle—a wrapper for their underlying investment. So if you buy an S&P 500 ETF and the S&P 500 goes down 50%, nothing about how cheap, tax efficient, or transparent an ETF is will help you.
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.
Symbol | Name | 5-Year Return |
---|---|---|
OEF | iShares S&P 100 ETF | 14.73% |
SPHB | Invesco S&P 500® High Beta ETF | 14.58% |
SPYG | SPDR Portfolio S&P 500 Growth ETF | 14.40% |
VOOG | Vanguard S&P 500 Growth ETF | 14.38% |
ETF | Assets Under Management | Expense Ratio |
---|---|---|
Vanguard Information Technology ETF (VGT) | $70 billion | 0.10% |
VanEck Semiconductor ETF (SMH) | $16.3 billion | 0.35% |
Invesco S&P MidCap Momentum ETF (XMMO) | $1.6 billion | 0.34% |
SPDR S&P Homebuilders ETF (XHB) | $1.8 billion | 0.35% |
What is the 4% rule for ETF?
It's relatively simple: You add up all of your investments, and withdraw 4% of that total during your first year of retirement. In subsequent years, you adjust the dollar amount you withdraw to account for inflation.
According to our calculations, a $1000 investment made in February 2014 would be worth $5,971.20, or a gain of 497.12%, as of February 5, 2024, and this return excludes dividends but includes price increases. Compare this to the S&P 500's rally of 178.17% and gold's return of 55.50% over the same time frame.
The top reasons for closing an ETF are a lack of investor interest and a limited amount of assets. For example, investors may avoid an ETF because it is too narrowly-focused, too complex, too costly, or has a poor return on investment.
Long-term investors generally look for ETFs they can hold for several years, or their full investment time horizon, which may be decades. Therefore, the best ETFs for the long term may include a diverse set of ETFs with low expenses, high assets under management and a long-term performance history.
Symbol | Name | Dividend Yield |
---|---|---|
TIME | Clockwise Core Equity & Innovation ETF | 17.63% |
BITO | ProShares Bitcoin Strategy ETF | 17.29% |
SVOL | Simplify Volatility Premium ETF | 16.69% |
ULTY | YieldMax Ultra Option Income Strategy ETF | 16.55% |
Ticker | Fund name | 5-year return |
---|---|---|
SOXX | iShares Semiconductor ETF | 30.70% |
XLK | Technology Select Sector SPDR Fund | 24.57% |
IYW | iShares U.S. Technology ETF | 24.09% |
FTEC | Fidelity MSCI Information Technology Index ETF | 22.79% |
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.
Stock-picking offers an advantage over exchange-traded funds (ETFs) when there is a wide dispersion of returns from the mean. Exchange-traded funds (ETFs) offer advantages over stocks when the return from stocks in the sector has a narrow dispersion around the mean.
Holding too many ETFs in your portfolio introduces inefficiencies that in the long term will have a detrimental impact on the risk/reward profile of your portfolio.
If Vanguard ever did go bankrupt, the funds would not be affected and would simply hire another firm to provide these services.
How much money should I invest in ETFs?
You expose your portfolio to much higher risk with sector ETFs, so you should use them sparingly, but investing 5% to 10% of your total portfolio assets may be appropriate. If you want to be highly conservative, don't use these at all.
ETFs can offer lower operating costs than traditional open-end funds, flexible trading, greater transparency, and better tax efficiency in taxable accounts. As with all investment choices there are elements to review when making an investment decision.
- Vanguard S&P 500 ETF (VOO -0.84%) ...
- Vanguard High Dividend Yield ETF (VYM 0.84%) ...
- Vanguard Real Estate ETF (VNQ 0.48%) ...
- iShares Core S&P Total U.S. Stock Market ETF (ITOT -0.78%) ...
- Consumer Staples Select Sector SPDR Fund (XLP 0.98%)
The Bottom Line
Investors who buy index funds will not lose all of their investment. That's because they're investments buoyed by hundreds or thousands of underlying securities. As such, they're highly diversified, making it almost impossible for them to reach a value of zero.
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.
References
- https://www.fidelity.com/learning-center/investment-products/etf/which-is-right-for-you
- https://www.fool.com/investing/how-to-invest/etfs/
- https://www.investopedia.com/articles/exchangetradedfunds/09/etf-out-of-business.asp
- https://www.fidelity.com/learning-center/investment-products/etf/etfs-cost-comparison
- https://coinpaper.com/3155/black-rock-vs-vanguard-comparative-analysis-of-investment-giants
- https://www.investopedia.com/articles/exchangetradedfunds/08/etf-taxes-introduction.asp
- https://www.unbiased.com/discover/investing/vanguard-vs-blackrock
- https://www.investopedia.com/articles/investing/020116/when-right-time-change-mutual-funds-etfs.asp
- https://www.investopedia.com/articles/investing/121515/why-3x-etfs-are-riskier-you-think.asp
- https://www.sec.gov/Archives/edgar/data/932471/000168386321006372/f10172d1.htm
- https://time.com/personal-finance/article/stocks-vs-etfs/
- https://www.nerdwallet.com/reviews/investing/brokers/vanguard
- https://www.cnbc.com/2024/03/08/warren-buffett-berkshire-hathaway-owns-2-etfs.html
- https://www.investopedia.com/vanguard-vs-fidelity-4587961
- https://www.investopedia.com/articles/investing/102915/why-are-etf-fees-lower-mutual-funds.asp
- https://www.covenantwealthadvisors.com/post/are-etfs-good-for-retirement-1
- https://www.pillsburylaw.com/images/content/3/2/v2/3201/C-S-Advisory-07-22-2010-II.pdf
- https://www.thestreet.com/etffocus/trade-ideas/the-only-leveraged-etf-that-i-would-buy-hold-long-term
- https://corporate.vanguard.com/content/corporatesite/us/en/corp/who-we-are/sets-us-apart/our-history.html
- https://en.wikipedia.org/wiki/The_Vanguard_Group
- https://investor.vanguard.com/investor-resources-education/retirement/planning-reach-your-goal
- https://www.etf.com/sections/etf-basics/how-choose-best-etfs-long-term-investing
- https://www.etf.com/etf-education-center/etf-basics/what-risks-are-there-in-etfs
- https://www.etf.com/etf-education-center/etf-basics/why-do-leveraged-etfs-decay
- https://www.kiplinger.com/investing/etfs/best-etfs-to-buy
- https://www.bankrate.com/investing/stocks-vs-etfs/
- https://advisors.vanguard.com/assets/corp/fund_communications/pdf_publish/us-products/investment-profiles/0710.pdf
- https://www.vanguard.com/
- https://www.fool.com/the-ascent/buying-stocks/vanguard-vs-charles-schwab/
- https://www.cnbc.com/select/what-are-etfs-should-you-invest/
- https://etfdb.com/compare/dividend-yield/
- https://www.investopedia.com/ask/answers/09/etfs-vs-mutual-funds.asp
- https://www.bankrate.com/investing/low-risk-investments/
- https://www.nerdwallet.com/article/investing/best-etfs
- https://investor.vanguard.com/how-to-invest-on-your-own
- https://www.trackinsight.com/en/education/how-many-etfs-should-you-own
- https://smartasset.com/financial-advisor/vanguard-vs-fidelity
- https://www.schwab.com/learn/story/etf-vs-mutual-fund-it-depends-on-your-strategy
- https://www.bankrate.com/investing/best-index-funds/
- https://money.usnews.com/investing/articles/vanguard-versus-fidelity-which-is-best-for-you
- https://www.etf.com/sections/etf-basics/10-best-performing-etfs-last-10-years
- https://lakshmishree.com/blog/15-best-etfs-in-india-to-invest-in-2024/
- https://www.fidelity.com/learning-center/investment-products/etf/risks-with-etfs
- https://www.investopedia.com/articles/investing/040516/10-cheapest-vanguard-etfs-voo-vti.asp
- https://www.fool.com/terms/e/etf-expense-ratio/
- https://www.icicidirect.com/idirectcontent/Home/StaticData/WeOfferETFUnderstanding.html
- https://www.investopedia.com/articles/investing/111115/5-reasons-choose-mutual-funds-over-etfs.asp
- https://www.fidelity.com/learning-center/investment-products/etf/etfs-tax-efficiency
- https://www.fpmarkets.com/education/trading-tips/how-many-etfs-should-i-own-as-a-beginner-in-2023/
- https://www.investopedia.com/terms/n/no-fee-etf.asp
- https://www.independentvanguardadviser.com/dont-rush-for-the-exit/
- https://investor.vanguard.com/investor-resources-education/etfs/etf-vs-mutual-fund
- https://www.fidelity.com/learning-center/investment-products/etf/benefits-of-etfs
- https://www.moneymanagement.com.au/news/funds-management/vanguard-slammed-climate-protesters-new-campaign
- https://seekingalpha.com/article/4203362-all-leveraged-etfs-go-to-zero
- https://www.techopedia.com/who-owns-the-most-blk-stock
- https://www.investopedia.com/financial-edge/0113/7-easy-to-understand-etfs-to-replace-a-savings-account.aspx
- https://www.investopedia.com/ask/answers/how-can-i-buy-sp-500-fund/
- https://www.investopedia.com/terms/c/closedfund.asp
- https://investor.vanguard.com/investor-resources-education/retirement/income-make-the-most-of-retirement
- https://objectivefinancialpartners.com/are-mutual-fund-fees-tax-deductible/
- https://www.schwab.com/learn/story/beyond-4-rule-how-much-can-you-spend-retirement
- https://www.investopedia.com/articles/mutualfund/07/etf_downside.asp
- https://www.investopedia.com/articles/investing/110515/who-are-owners-vanguard-group.asp
- https://www.investopedia.com/articles/investing/020916/etfs-can-be-safe-investments-if-used-correctly.asp
- https://guides.pm-research.com/content/iijetfind/2009/1/144
- https://www.investopedia.com/articles/stocks/09/buying-stock-or-etf.asp
- https://www.investopedia.com/articles/investing/120415/how-dividendpaying-etfs-work.asp
- https://www.schwab.com/etfs/mutual-funds-vs-etfs
- https://www.macroaxis.com/invest/ratio/VTSAX/Probability-Of-Bankruptcy
- https://www.kotaksecurities.com/mutual-funds/how-mutual-funds-work/
- https://www.morningstar.com/etfs/etfs-2023-tale-success-failure
- https://www.investopedia.com/ask/answers/06/canindexfundsgounder.asp
- https://www.etf.com/etf-education-center/etf-basics/etfs-retirement
- https://money.usnews.com/investing/articles/best-etfs-to-buy
- https://etfdb.com/compare/highest-5-year-returns/
- https://www.investopedia.com/articles/investing/090115/7-best-etf-trading-strategies-beginners.asp
- https://www.schwab.com/learn/story/what-happens-if-your-etf-closes
- https://investor.vanguard.com/client-benefits/investment-fees
- https://www.titan.com/articles/how-much-do-etfs-cost
- https://www.schwab.com/learn/story/etfs-how-much-do-they-really-cost
- https://medium.com/@alimroshan246/how-black-rock-controls-the-world-67d5c87423bd
- https://m.economictimes.com/markets/expert-view/when-is-the-right-time-to-exit-a-mutual-fund-what-are-the-tax-implications-shilpa-bhaskar-gole-explains/articleshow/104322229.cms
- https://www.vanguardinvestor.co.uk/need-help/answer/what-happens-to-my-money-if-vanguard-become-insolvent
- https://www.etfcentral.com/etf-u/guides/how-many-etfs-should-i-own
- https://www.bankrate.com/investing/mutual-fund-vs-etf-which-is-better/
- https://www.thestreet.com/dictionary/leveraged-etf
- https://investor.vanguard.com/about-us/why-vanguard
- https://www.invesco.com/us/en/insights/how-etf-navs-are-calculated.html
- https://www.investopedia.com/articles/exchangetradedfunds/11/advantages-disadvantages-etfs.asp
- https://www.canstar.com.au/investor-hub/buy-sell-hold-etfs/
- https://www.titan.com/articles/etf-drawbacks
- https://www.quora.com/Will-investors-of-iShares-ETFs-lose-their-money-if-BlackRock-goes-bankrupt
- https://finance.yahoo.com/news/invested-1000-p-global-decade-133005715.html
- https://investor.vanguard.com/investor-resources-education/taxes/how-mutual-funds-etfs-are-taxed
- https://www.fidelity.com/learning-center/investment-products/etf/drawbacks-of-etfs
- https://www.fool.com/investing/how-to-invest/index-funds/safest-index-funds/
- https://www.investopedia.com/ask/answers/071816/how-are-etf-fees-deducted.asp