Investing with ETF’s: Strategies for Long and Short Term Investors

ETFs (Exchange Traded Funds) continue to grow in popularity among global investors, and the universe of available ETFs continues to expand to meet the ever-growing demand. ETFs listed on US exchanges form the bulk of globally available ETFs. Whether you’re a short-term or a long-term investor, or a little of both, there’s an ETF out there for you.

There’s an ETF to Fit Your Strategy

ETFs are generally grouped into a few major categories according to asset classes (stocks/bonds/commodities/etc.), which makes it easier for investors to find the ETF that fits their desired strategy. Those main asset categories are then frequently divided into narrower fields such as geographic region (e.g. German stocks), market capitalization (e.g. large/mid/small cap), industrial sector (e.g. Technology), or maturity (e.g. 10+ years), to name just a few.

The broader the category, the greater the number of individual securities held in the ETF, and the narrower the category, the fewer securities in the ETF. For instance, a large-cap European stock index ETF might contain over 1,000 different stocks, while a more narrowly focused ETF, such as one focused on water industries, might have less than fifty stocks in it. The number of holdings in an ETF is an important factor for the volatility of the ETF.

Long-term Strategies (Investing Time Horizon > 3 years and longer)

Long-term investors will be focused on achieving investment returns from long-term price appreciation and dividend earnings, aided by the magic of compounding. Investors focused on the long-term are probably better off focusing on broad-based index ETFs according to their desired asset allocation mix (stocks vs. bonds, for example). Broad-based index funds are the most widely diversified and have among the lowest ETF management costs. The wider diversification should reduce the volatility of the ETF, while lower expenses are critical to minimize investing costs.

Long-term investors, by definition, will be holding the investments for many years, so keeping volatility and investing costs low is essential to protecting long-term. Long-term investors can diversify further by geographic region, focusing on Asia, for example, or global categories, such as Emerging Markets or Global Materials shares.

Short-term Strategies (Investing Time Horizon <3 years and shorter)

Short-term investors are typically seeking gains from periodic trends that can last for a few months to a few years. Such trends, or themes, typically favor particular sectors (such as Biotechnology), geographic regions (such as Developed Europe), or even more specific global themes (such as Cybersecurity). That means that short-term investors are likely to focus on narrowly concentrated ETFs. Keep in mind that the narrower the focus of the ETF, the fewer stocks it will hold, potentially resulting in higher volatility, both up and down.

Shorter term investors will need to follow their investment themes more closely for any changes to the underlying trend. For instance, Biotechnology stocks could be a great performer for several years, but then fade as the industry matures. A period of weak economic performance could benefit defensive sectors, such as Utilities or Consumer Durable Goods, which could then falter if the economic outlook improves. As such, short-term investors will need to make more frequent adjustments to their portfolios, selling investments that may have peaked and buying investments that may improve.

ETF Investing Considerations for All

Regardless of your investing timeframe, it’s always important to remember the basics of risk management. Investing with ETFs, just like shares of individual stocks, carries market risk—the risk that prices will go down and you could lose money. Beyond that, when evaluating an ETF make sure you understand what it’s actually investing in. Don’t just go by the name of the ETF as that could be misleading. A few minutes spent researching an ETF through its prospectus or information sheet will tell you what you need to know. To learn more, please see ‘What to Look for in an ETF.’

No matter what your investment style is, there’s likely an ETF that’s been designed to fit your desired investing strategy. ETFs are a great way to develop a diversified portfolio that can track the whole market or target specific opportunities you’ve identified. All at a low cost in a single transaction.

All investing carries risk. Past performance is not indicative of future returns, which may vary. Investments in stocks and ETFs may decline in value, potentially leading to a loss of principal. Online trading has inherent risk due to system response and access times that may be affected by various factors, including but not limited to market conditions and system performance. An investor should understand such facts before trading. The risks associated with investing in international securities, including US-listed ADRs and ETFs that contain non-US securities include, among others, country/political risk relating to the government in the home country; exchange rate risk if the country’s currency is devalued; and inflationary/purchasing power risks if the currency of the home country becomes less valuable as the general level of prices for goods and services rises.

Most inverse ETFs “reset” daily, meaning that these securities are designed to achieve their stated objectives on a daily basis. Their performance over periods longer than one day can differ significantly from the inverse of the performance of their underlying index or benchmark during the same period of time. This effect can be magnified in volatile markets, making it possible that you could suffer significant losses even if the long-term performance of the index showed a gain. While there may be strategies that justify holding these investments longer than a day, buy-and-hold investors with an intermediate or long-term time horizon should carefully consider whether these ETFs are appropriate for their portfolio.

Before investing in an ETF, an investor should consider the investment objectives, risks, charges, and expense of the investment company carefully. The prospectus contains this and other important information about the investment company. You should read the prospectus carefully before investing.