Etfs are better for long-term investment, but can also be used for short-term trading. For example, the Standard & Poor’s 500 Index ETF (SPY) has an average annual return of 13.6% over the past 10 years, while the Vanguard Total Stock Market ETF (VTI) has an expense ratio of just 0.03%, which is significantly increased by the compounding effect of long-term holdings. Short-term traders can use the ProShares UltraPro Short S&P500 (SPXU) to achieve a monthly return of more than 70% during market downturns.
Advantages of investing in ETFs for the long term
Etfs provide access to a variety of assets, including stocks, bonds, products, and more. The Vanguard Total Stock Market ETF (VTI) contains about 3,900 U.S. stocks, diversifying the dangers of a single stock. According to Morningstar data, VTI’s annual return rate has reached 12.8% over the past 10 years. Diversified investment significantly reduces the impact of specific property fluctuations and helps complete stable long-term returns.
Etfs generally have lower expense ratios than other funds. The SPDR S&P 500 ETF Trust (SPY), for example, has an expense ratio of just 0.09%, while an automated fund typically has an expense ratio of more than 1%. Assuming a $100,000 investment with an annual return rate of 7%, the low-fee ETF would be worth $761,000 after 30 years, while the high-fee fund would be worth just $575,000.
Many ETFs pay earnings, such as the iShares Select Dividend ETF (DVY), which has a dividend yield of 3.6%. Over the past 20 years, refinancing earnings has boosted the average annual return on the S&P 500 index from 6.0% to 9.5%, according to Bloomberg data. Long-term holding and re-investment profit can significantly add final investment income.
Because of their unique structure, ETFs are generally more tax-efficient than mutual funds. The iShares Core S&P 500 ETF (IVV), for example, has an average annual after-tax return of 10.5%, compared with 9.0% for a similar self-managed fund. Through the in-kind exchange mechanism, IVV can reduce the distribution of capital gains, reduce the tax burden of the investor, and increase the net return.
Etfs offer the flexibility to invest in a specific sector, region or property class, such as the iShares MSCI Emerging Markets ETF (EEM), which covers more than 1,200 stocks in 26 emerging market countries. According to Morningstar, EEM has returned 4.7% annually over the past 10 years. This flexibility allows investors to adjust their investment mix according to the economic situation and market outlook, and optimize long-term investment strategies.
Long-term ETF investment considerations
Identify long-term financial goals, such as retirement savings. According to research by Fidelity, to reach a retirement income of $50,000 a year, you need $1 million in savings at retirement. Assuming a 7% annual return, a $500 monthly ETF, such as the Vanguard Total Stock Market ETF (VTI), would accumulate about $618,000 after 30 years.
Allocate property among different property classes, such as stocks, bonds, and products. The study shows that the financial equipment has resolved more than 90% of the investment return. Vanguard’s portfolio of 60% stocks and 40% bonds, for example, has returned 6.4% annually over the past 20 years.
Review and rebalance the investment portfolio regularly. According to Schwab, regular portfolio rebalancing improves returns by 0.4% to 0.6% a year. For example, adjusting the portfolio of the Vanguard Balanced Index Fund (VBIAX) annually or quarterly to maintain a 60/40 mix of stocks and bonds helps keep the portfolio consistent with a long-term approach.
Stay informed, track trends and changes in funding. According to Morningstar data, auto-funded investors have a higher return rate during periods of market turmoil. In the case of the SPDR S&P 500 ETF Trust (SPY), for example, the average annual return of an automated trader who continuously tracks and adjusts their contributions is 11.4% between 2010 and 2020, compared with 10.2% for passive holders.
Consult a financial advisor for personalized advice. According to Vanguard’s research, financial advisers can add about 3% to their donors’ net returns annually through financial equipping, tax planning, and behavioral coaching. Assuming a portfolio of $500,000 with an annual return rate of 7%, the annual return rate can be improved to 10% after consulting the adviser, which means that the value of the investment increases from $3.76 million to $8.72 million after 30 years.
Short to medium term trading
Investors can use ETFs to capture short-term market fluctuations or trends. For example, the ProShares UltraPro Short S&P500 (SPXU) is a triple short ETF that outperforms during market downturns. According to Morningstar data, during the March 2020 market slump, SPXU’s monthly return rate was as high as 70%. This short-term buying and selling strategy requires close monitoring of the market and rapid response to maximize returns.
Some investors use ETFs for medium-term strategies, holding them for several years to benefit from the economic or career cycle. For example, the iShares U.S. Technology ETF (IYW) will return 21.5% annually between 2015 and 2020, significantly higher than the 9.7% annual return of the standardized S&P 500 index over the same period. This medium-term funding strategy uses the growth potential of the occupation or theme to achieve higher returns over the business cycle.
