How to Make Money with ETFs

Learn everything you need to know in 'The ETF Investor's Handbook' for FREE from The Successful Investor.

ETFs Guide for Canadian Investors: Find the best way to invest in ETFs with low fees, low risk & high satisfaction.

Topic: ETFs

Learn How to Invest in ETFs Profitably and Build a Diverse Portfolio

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Discover how to invest in ETFs with a proven strategy and you will be able to build a diversified portfolio of investments

We stay out of ETFs that use leverage (debt), those that aim to pursue some sort of market theory and also those that invest in a narrow market segment, or theme.

We’ve found that our exclusionary rules leave us plenty of scope for sound investing, with lots of high-value opportunities and few surprises. Discover how to invest in ETF units with proper insight and you will have the opportunity to profit with your investments.

How to Make Money with ETFs

Learn everything you need to know in 'The ETF Investor's Handbook' for FREE from The Successful Investor.

ETFs Guide for Canadian Investors: Find the best way to invest in ETFs with low fees, low risk & high satisfaction.

Learn how to invest in ETFs successfully understanding “model portfolios,” including aggressive ETF portfolio models, and how they can impact your profits

These days, some of the most misleading ads you’ll see concern so-called “model portfolios.” All too many brokers use these model portfolios to build their businesses.

The big problem with these model portfolios is that as the ads explain in their fine print, these calculations don’t reflect trading that actually happened. Nobody turned $100,000 into $1.7 million. Instead, the fine print explains that the results show “hypothetical or simulated performance” and are “not meant to represent actual performance results.”

The main problem with hypothetical model portfolios is that they rarely, if ever, produce results that you can achieve in the real world. One reason why is that aggressive hypothetical management can inflate model portfolio results.

Stick with “traditional” ETFs when you consider how to invest in ETF and you will keep more money in your pocket

We think you should stick with “traditional” ETFs. However, when an investment product faces booming demand as ETFs do today, investment companies try to expand sales by creating new versions of the underlying formula.

These new ETFs use a conventional stock-market index as a base, but add their own refinements. These refinements are tailored to current investor preferences or prejudices. That’s distinctly different from the traditional ETFs, which simply aim to mimic an index. These newer, theme varieties may attract attention—and sales—but they frequently carry higher MERs.

In some cases, the new ETFs may provide investment benefits but not consistently. In fact, it may hurt results in the long run. The worst cases are bad enough to turn investor profits into losses. One sure result is that the higher MERs will cut into the value of your ETF portfolio every year.

Another drawback to the new ETFs is how much easier it is for investors to act on an urge to invest in a specific stock or stock group without doing any messy and time-consuming research.

Discover how to invest in ETF shares and lower your risk with these usable tips

  • Know how broad the fund is, so you can determine its volatility. The broader the ETF, the less volatility it may have. A sector-based ETF like one that tracks resource stocks may be more volatile.
  • Know the economic stability of countries when investing in international ETFs. It’s also good to mention that foreign governments may not be your ally when it comes to passing legislation that can affect your investments
  • Know the liquidity of ETFs you invest in: the number of units traded on a daily basis indicates how easy it is or is not to sell your units profitably on the open market.
  • Determine if the ETFs you buy will include capital gains distributions.
  • Consider buying ETFs in a lump sum rather than periodic small amounts to cut down on brokerage fees.

Why we prefer ETFs over buying mutual funds

  • ETFs are less expensive to hold. ETFs give you a low-cost way to invest in a narrow market segment. That’s typically cheaper than investing in a mutual fund with a similar focus. With fees as low as 0.10% a year for ETFs vs. mutual funds that can charge you 2% to 3% or higher on their fund. ETFs can save you a lot of money and boost your return if you are investing over time.
  • ETFs trade on stock exchanges, just like stocks. That’s different from mutual funds, which you can only buy at the end of the day at a price that reflects the fund’s value at the close of trading.
  • Low turnover. Shares are only added or removed when the underlying index changes. As a result of this low turnover, you won’t incur the regular capital gains taxes generated by the yearly distributions most conventional mutual funds pay out to unitholders.

One interesting note about buying mutual funds comes from the Dalbar organization. This U.S. research firm’s look at top-performing mutual funds shows most of their investors who jump in at the top will lose money or make negligible returns. That’s because most investors in a top-performing fund only buy into the fund after it has already made big gains. Investors also tend to sell former top-performing funds only after a major slump in the value of their holdings. When you chase investment performance, it’s all too easy to buy at the top and sell at the bottom.

Use our three-part Successful Investor approach for all of your ETF investments

  1. Hold mostly high-quality, dividend-paying stocks.
  2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
  3. Downplay or stay out of stocks in the broker/media limelight.

Do ETFs offer enough growth for you or do you prefer stocks that can rise higher over a shorter period of time?


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