Should I Trade ETFs?
This is a pertinent question to all new investors/traders who are thinking about whether or not trading ETFs is the right investment vehicle for them. The key to answering this question is really to understand the fundamentals of trading ETFs and your own trading/investing philosophies, also making sure that they are aligned with each other. In other words, do not follow hype and hearsay and jump into trading ETFs just because you want to make a lot of money.
With that said, here is a simple breakdown of what ETFs are:
1. Low Trading Fees – Since they trade like stocks, you do not have to pay a management fee for trading ETFs as you would with mutual funds. Investors can buy and sell stocks of ETFs during market hours. Each purchase or sell will cost you a commission.
2. Moderate Volatility – The volatility of an ETF largely depends on the underlying asset index/class that it is trying mimic and the volume of shares being traded. Because of its stock-like nature, ETFs have moderate volatility.
You have to really consider your financial situation and degree of risk tolerance before deciding if trading ETFs are right for you. For example, if you are into long term investments of larger amounts of money, mutual funds might seem like a more sound investment because it is more hands-off and will not burn your money through commission charges.
In simple terms, trading ETFs might not be suitable for you if:
1. You want excellent returns but are not prepared for the potential risks involved.
2. You do not have a deep understanding of the macroeconomic condition as well as how it might affect the underlying asset class of your ETF.
3. You do not understand the concept of risk-management. The reason is because ETFs can be traded on margin and allows for short selling. This can turn ETFs into a derivative, which is higher in order of complexity. Risk management also involves knowing your own financial situation and assessing the amount of money that you can afford to lose.
4. Do not have an understanding of the ETF manager and his/her track record. You need to be comfortable that the fund manager of the ETF you are investing in has the resources, track record, experience and capabilities to handle your investment. Of course, you need to understand that past records does not necessarily guarantee future success.