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

Use caution when building an aggressive ETF portfolio model to boost your returns

currency hedging comes at a cost

You can develop an aggressive ETF portfolio model to add to your conservative profits—but we recommend you follow these tips

We still feel that investors will profit the most with a well-balanced portfolio of high-quality individual stocks, but ETFs can also play a role in a portfolio. Here are some tips on how to find the best performing ETFs—including aggressive ETFs.

If you want to invest in equities through ETFs, we think you should put the bulk of your holdings in the type of conservative ETFs we recommend in Canadian Wealth Advisor.

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.

We also recommend some aggressive ETFs in Canadian Wealth Advisor, however, you may want to devote a smaller part of your portfolio to more aggressive holdings. Our favourite aggressive ETF portfolio model looks for funds that invest in well-established  companies that have a strong hold on their markets.

Aggressive investors should use caution when looking for aggressive ETF additions

You should avoid aggressive ETFs that mainly invest in stocks of companies that hold a lot of concept stocks, or that do a lot of trading, or that delve into options or futures trading.

These aggressive ETFs and stocks are only suitable for investors who are willing to accept higher risk.

Our aggressive selections tend to be more highly leveraged and more volatile than our conservative recommendations, and they can give you bigger gains and bigger losses. This may be due to financial leverage, or to the risk in their industry or particular situation, or our estimation of upcoming changes in that risk. Keep in mind, though, that these or any aggressive investments should comprise only a smaller part of an investor’s portfolio.

Ultimately, the percentage of your portfolio that should be held in either conservative or aggressive investments depends on your personal circumstances. An investor with a longer time horizon or without the need for current income from a portfolio can invest some money in aggressive ETFs or stocks.

Watch out for broker “model portfolios,” including aggressive ETF portfolio models, to keep your money safer

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, 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. Here is one reason why:

Overly aggressive hypothetical management can inflate model portfolio results: Of course, it’s safe to manage hypothetical model portfolios much more aggressively than real-life investing in the stock market. That gives the hypothetical account great returns when it succeeds, but it runs up much steeper losses when it fails. However, the losses are only hypothetical, so they can be easily disposed of. When the losses reach embarrassing levels, the broker can simply forget the old hypothetical account. They can then start a new hypothetical account that may do better.

Brokers may start up several hypothetical accounts, and eliminate all but the top performers over a period of years until they are left with just one hypothetical account that makes them look brilliant. Mutual-fund companies do the same. Fund company employees refer to the start-ups as “incubator funds.” These funds have little money in them, so it’s inexpensive to treat them in such a way that they build a great record. It’s even easier for a broker to build a top performance record for a hypothetical account where there’s no money involved.

Avoid these types of ETFs, even if you are looking to build an aggressive ETF portfolio model segment

Hedged ETFs: Some ETFs are hedged against movements in foreign currencies. Hedging costs will vary, depending on conditions in the foreign-exchange market, and on how an ETF carries out its hedging program. But these fees can double or triple the typical 0.30% to 0.70% ETF management fee.

Short ETFs: A short ETF is designed to rise in value as the underlying market index falls: for example, if the index falls by 1%, the shares of the ETF should rise by 1% and so on. However, as a general rule, we advise against short selling as much as we advise against options trading, leverage, currency speculation and bond trading. In all of these activities, it’s a rare investor who makes enough profit to compensate for the risk involved. Our view is that if you like the outlook for a market index, you should invest in stocks that will profit from a rise in that index. If you don’t like the outlook, then don’t invest.

Leveraged ETFs: There are a number of ETFs and other types of investments that aim to offer a two-for-one leveraged bet on the upward direction of oil prices and other commodity or index prices. These are leveraged ETFs. As a general rule, we advise against investing in leveraged ETFs, or anything that requires highly successful market timing. That’s because if you guess wrong, they can go down just as fast.

Bonus tip: Use our three-part Successful Investor approach to make the best stock selections

  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.

What do you consider worthy investments for an aggressive ETF portfolio?

How much of your portfolio is made up with aggressive investments?


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