ETFs – Why You Should Be Using ETFs In Your Own Portfolio

| February 27, 2009 | 0 Comments

I was at lunch the other day with a friend of mine.  Bob and I have known each other for about 12 years now.  We recently reconnected and met-up over lunch.  It was perfect for me… he paid.  (Those of you who know me know how frugal I am!)  Anyway, we were talking about his business.  He’s a computer consultant, and business was going well.

What surprised me was his next comment.  Knowing how much I studied the financial markets, he asked me for help.  He’d recently moved a big chunk of his retirement proceeds into cash.  I asked what his next move was:

“Probably reinvest slowly in a few mutual funds… maybe some individual stocks.”

“Why don’t you look at buying a few good ETFs,” I suggested.

That’s when I got the stare.

I’ve seen it a hundred times before.  The stare is an easy way to identify when someone’s in over their head.  They have no idea what you’re talking about.  They don’t even know enough to ask a question or two.

That’s the look Bob gave me.

Slowly he started shaking his head… “I have no idea what ETFs are.”

Bob’s not alone.  Lots of bright and savvy investors are in the same boat.  They’ve heard of ETFs.  They’ve looked at them a bit, but they don’t quite understand ‘em.  And that’s unfortunate given what a powerful portfolio tool they can be.

We recently brought on board an ETF expert – Corey Williams – to help our subscribers navigate the exciting world of ETFs.  More importantly, he’ll show us how to profit from them.  He’s got a very interesting background, and we’re expecting great things from him.  I’ll tell you more about Corey in a little bit.

Back to ETFs.

Personally, I love ETFs.  I’ve used them in my own portfolio for more than a decade.  As a matter of fact, right now, the vast majority of my retirement dollars are invested in ETFs.

I know what you’re thinking… ok great, so what’s an ETF?

Put simply, an ETF is a ‘basket’ of securities (similar to a mutual fund but with some key advantages).  Depending on the ‘basket’ you select, it can hold a great deal of different investments.

For example, there’s an S&P 500 Index ETF (SPY).  You may have even heard about it.  If you buy this ETF – right now trading around $80 per share – you get a little piece of all 500 stocks in the index.

There’s another ETF focused on healthcare.  It holds 32 different healthcare and healthcare-related companies.  If you buy that one ETF, you get a little piece of each and every one of these 32 companies. There’s even ETFs that hold commodities, currencies, and bonds.

At last count there’s more than 800 ETFs that actively trade on the markets.  And here’s the great thing.  They trade just like stocks.

So, now that you know what ETFs are… why would you use them?

Good question.  There are lots of benefits to ETFs, but here are the five most important.

First, ETFs are low cost.

Most mutual fund management fees (what a manager gets paid to lose… I mean invest your money) is huge.  Sometimes they can be as much as 3% or 4% or more for specialty funds.  Don’t forget this management fee gets collected every year… even if the manager loses money.  In contrast, most ETFs have much smaller fees, some can be as low as 0.15%.

Second is liquidity.

Liquidity is very important.  Being able to find a seller when you want to buy, and finding a buyer when you want to sell is the difference between an investment and a waste of money.

Since most ETFs trade on the big exchanges just like stocks, liquidity is rarely a problem.  There are ETFs that trade millions and millions of shares every day!

This makes them a perfect way to get into and out of positions very quickly… and without a lot of headache or cost (you just pay a regular commission, as if buying a stock).

Third leverage.

Some ETFs can be used by aggressive traders to maximize performance. By investing in a leveraged ETF you can get two or three times leverage in your investment.  No need to borrow money or jump through hoops to get a margin account.  These leveraged ETFs provide huge returns to investors when the market moves in the right direction.

The fourth reason I like ETFs is the ability to profit even if the market falls.

It doesn’t matter what direction the market is heading.  Some ETFs are designed to move inverse of the index they’re tracking.  That means if the market falls, these inverse ETFs go UP in value!  Imagine the profit potential from today’s falling market.

Finally, ETFs have great investment purity.

Most ETFs are focused on a specific index or industry.  This allows us to invest in a very focused way.  With ETFs we can invest in certain sectors, and even sub-sectors.  This allows us to identify areas of the market with the biggest profit potential.

So there you have it, five great reasons to use ETFs.  If you’re not taking advantage of the power of ETFs right now, I suggest you begin taking a closer look.  Trust me, you’ll be glad you did!

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Category: ETFs

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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