What are the pros & cons of an ETF?

Question

What are some pros & cons of ETFs?

Detail please!

Answer 1

Suppose I set up an ETF to invest in the top 10 most profitable companies traded in the US. Suppose I then set up a traditional mutual fund doing the same thing.

The ETF essentially sells shares when people buy the ETF shares and along with a reasonably close match of the ETF price compared to the Net Asset Value of the stocks it holds. That is about all the management that is needed.

In the mutual fund, however, there is a different problem with people buying in, or cashing out, besides the extra accounting headaches such as comparing transactions to the rules to make sure we don't have those timing problems that were done a while back. You can find the fund with too little cash when people are leaving, so you have to sell some of the holdings, or too much when people are coming in, so you have to buy more holdings, sometimes at inopportune times and prices--all of which affects the values and expense fees.

Now then, there is another issue, apportionment. Some ETFs essentially begin with the same dollar amounts for comparable holdings and that equality gets thrown out of whack by market valuations (hint, of the 30 Dow Jones Industrials, last I checked, 10 held half the value), but what if, instead, I bought 100 shares of each of the ten in my above example for each block of purchases I made? Then the higher dollar shares would amount, at the very start, with a higher percentage of your investment dollar. That may be good, that might not. With an ETF whichever scheme is essentially carved in stone and mechanically carried out.

Now, in my actively managed mutual fund, when I see things like MO or WMT falling in price for a prolonged period, I might want to minimize my holdings in them, and maximize, say, COP (which has almost tripled in the last year or so). The NAV for your holdings goes up, my fees for watching and adjusting goes up, and the picture of value for the mutual fund will change while the ETF doesn't, even though they are essentially doing the same thing.

Check out the ETF holdings and their relative share of the pot. If it is comparatively equal, allowing for the dogs to sink and the rockets to rise being reflected in the allocation, then you are on track for something good. But if it is lopsided, mutual fund or ETF, or there is a lot of volume in turnover, or if there is a big gap in the market value vs. the NAV, then do something different. Frankly, I like ETFs and I suspect that too many funds churn the holdings to increase their expense fees, in my opinion. Either way you look at this, there is garbage and there is gold, even when they advertise that they do the same thing. ETFs like DIA or SPY, for instance are much better than most regular funds that track the Dow Jones Industrials or the S&P500.

Answer 2

Diversification is an attractive feature of ETFs. Instead of taking concentrated risks by purchasing individual stocks, investors can own an index of stocks with ETFs. Owning individual stocks has special risks and often requires diligent attention.

In addition to reducing market volatility, many investors have cut their commitment to time consuming and expensive stock research. By over and underweighting ETF industry sectors, for example, investors can obtain an optimal allocation that suits their financial goals.

Like individual stocks, ETFs can be leveraged with margin. Margin is borrowing money from a broker to buy securities and involves considerable risk. Minimum maintenance requirements are enforced by the NASD (National Association of Securities Dealers), the NYSE and by individual brokerage firms. While margin investing can be profitable for investors correct about the direction of their holdings, the interest charges or borrowing costs can deteriorate returns.

There are a multiplicity of option strategies with both stocks and ETFs. Purchasing call or put options is an aggressive technique. An options investor can control a large amount of ETF shares by paying a premium. The premium price is a fraction of what it would cost to purchase the shares in the open market. This provides an options investor with a great deal of leverage and a high risk/reward opportunity.

A more defensive approach uses put options in conjunction with portfolio holdings. Buying protective puts on ETF or stock positions would insure a portfolio against declining prices. There are many other tactical possibilities with options.

ETFs, like individual stocks, can be shorted. Shorting involves selling borrowed shares an investor does not own in expectation the price of an ETF will decline in value. If the ETF does decrease in value, it can be bought by the short seller at a lower price, which results in a profit. Shorting individual stocks on a downtick is prohibited, whereas ETFs are exempt from this rule. This translates into easier and fluid short selling with ETFs. Shorting is an advanced technique and involves substantial risk.

Wash-sale rules don't permit investors to realize a stock loss if they repurchase the same stock within 30 days. This problem can be avoided with smart tax loss planning. By redeploying the loss proceeds into an ETF in the same sector as the stock, for example, the wash-sale rule can be avoided. This allows investors to offset any capital gains with capital losses and still maintain market exposure.

For employer sponsored retirement plans, stocks of other companies and ETFs may not be available as an investment option. Self-directed retirement plans may offer a broader menu of investment choices which may include stocks and ETFs.

Also since ETFs often follow an index or sector, they don't produce the same results as hand-selecting stocks. But you should also think about the amount of time you want to spend stock picking.

All in all ETFs are a great idea and advantageous over individual stocks.

Answer 3

pros: over 800 to choose from.
low expense ratios for EFT index funds
index funds are very tax efficient
can be traded any time the stock market is open for trading
closed end funds can sometimes be purchased at extreme discounts to net assets approaching and exceeding 15%.

cons: At the moment I can think of only one or two.
closed end fund managers are not answerable to anyone for performance. Some index funds are so esoteric they may self distruct after a few years time.

Answer 4

This penny stock service has years of proven experience. Ultimately it is the best service for beginners to use https://tr.im/M3Srr
You will have to wait between 3 and 10 days to get into the system in most cases. When I signed up it took 8 days. I wished it was faster, but if you can wait a week or two to start earn life changing money than you will have what it takes to make it in this business.

Answer 5

Penny stocks are loosely categorized companies with share prices of below $5 and with market caps of under $200 million. They are sometimes referred to as "the slot machines of the equity market" because of the money involved. There may be a good place for penny stocks in the portfolio of an experienced, advanced investor, however, if you follow this guide you will learn the most efficient strategies https://tr.im/c8109

Answer 6

EFT's are fast and usually easy to set up. However, if something goes wrong with the underlying transaction, the banks will only reverse or challenge a EFT in case of BANK ERROR in doing the transfer. No recourse for bas service or merchandise.

Answer 7

Hi, i recommand you a good and basic tutorial for investing. it covers all Issues related to your Investing and everything around it.

http://www.investingtutorial.info/

wish it will help you.

Good Luck , Best Wishes!