ETFs–exchange-traded funds–consist of multiple assets that are combined into one investment vehicle, divided into shares, and sold on an exchange. While they may be a good option for those looking to diversify their portfolios, ETFs are also useful for making money.
Like any investment, ETFs are only as strong as the underlying assets that comprise the security. In order to begin thinking about potential ETFs, you should first determine your overall investment strategy. Once you have defined your investment goals and corresponding time horizons, picking the ETFs you wish to acquire will become much easier. Take into consideration that diversification and timing are two factors that will help you make money through ETFs.
Your ability to generate wealth from ETFs will rely upon making smart, data-based choices and acquiring assets that you believe possess value. TipRanks’ ETF Screener will provide you with advanced tools to review and consider over 3,000 ETFs, ranging from conservative options to high-growth products.
ETFs as a Diversified Vehicle
One way to make money with ETFs is to diversify your ETF portfolio. By definition, ETFs represent diversified assets. Though the benefit of diversification is that it reduces the risk that a single investment will sink your savings, this does not mean that all ETFs are created equal.
For instance, ETFs that consist of fixed-income bonds from developed markets would be on the conservative end of the risk-reward spectrum. However, if your tolerance is higher, you could consider purchasing an ETF that is comprised of small-cap technology stocks. Your potential for growth would be bigger, but your risks would be as well.
One of the great benefits of ETFs is that they provide entry points to various investments, industries, and sectors that small-scale investors generally would have difficulty accessing, such as real estate. ETFs allow investors to consider different sectors and industries that they believe offer opportunities for growth, such as technology companies or healthcare firms. In other words, ETFs provide the potential for focused diversification, combining the ability to invest in specific industries without taking on the risk that the failure of an individual company would drastically impact your account.
The TipRanks’ ETF Center will allow you to search for ETFs according to a number of different filters, including asset class, geography, and upside potential. Thus, you can choose to buy ETFs from a variety of sectors, in order to further diversify your investments.
How Long Should You Hold an ETF?
Another way to make money with ETFs is to hold each type for the right amount of time. In addition to understanding the type of ETF you are looking to acquire, it is also important to understand the length of time you intend to hold onto each investment.
For instance, over the long-term, the stock market has generated value over the years, despite short-term dips, slowdowns, and even the occasional recession. It follows, therefore, that ETFs that are built to mimic stock markets would make sense to hold for years, if not decades. These ETFs can be part of a long-term strategy for investors, especially those who do not plan on being active traders.
For investors who plan on trying to anticipate changes in the market, ETFs can offer an avenue to try and take advantage of trends in the overall economy. For instance, if you believe that a slowdown is approaching, it might make sense to think about moving from a growth ETF to one comprised of companies that are selling consumer staples. You have to regularly think about timing when it comes to buying and selling ETFs.
In general, the longer you are able to invest your monies, the more benefit you are likely to enjoy. In addition to the historical trend of the rising stock market, this is due to the magic of compound interest (whereby your gains will start to enjoy their own gains). Experimenting with the TipRanks’ compound interest calculator can help you understand how your investments will benefit from this dynamic, allowing you to progressively accumulate more and more wealth over time.
Conclusion: ETFs as a Means, Not an End
ETFs offer a relatively easy way for investors to enjoy the benefits of diversification, and to make money doing so.
While they provide an avenue to invest in multiple holdings through the act of holding a single security, ETFs are as varied as the markets they are traded on. Understanding your investment objectives, timeframes, and risk tolerance are a vital part of any investment strategy. This holds true for ETFs, just as it would for any other investment opportunity.
ETFs are a means to invest in a particular sector, geography, or index, and should be thought of as such. While they can be a valuable part of any portfolio, at the end of the day their worth will reflect the assets they are comprised of.
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