In this article, we will take a look at ETF investing strategies for beginners. If you are a beginner investing in the US stock markets, you may not have the expertise to pick stocks. So, it makes sense to have an ETF-only portfolio. You can read about the benefits of investing in ETFs here.
First, we will answer the question- what is an ETF? An ETF stands for exchange-traded funds. It is a collection of many stocks/bonds that are traded under one fund, very similar to mutual funds. However, unlike mutual funds, ETFs are traded on the US stock exchanges with real-time pricing. Here are 4 ETF investing strategies to get you started.
1. Dollar-cost averaging
Here, you buy assets worth a fixed amount of dollars regularly, irrespective of how the price of the asset changes. When you are a beginner in US investing, you should try and save a regular amount in an ETF or a group of ETFs every month, even if it is a small amount. This helps you build discipline in your saving process. The idea is not to time the market, but to spend time in the market.
2. Asset allocation
In simple terms, it means that you should not put all your money in a single asset category. Instead, you spread it across different asset classes like stocks, bonds, commodities, and so on. ETFs can help a beginner implement a basic asset allocation strategy. Your asset allocation should be based on your risk profile. For example, when you are in your 20s, equity ETFs may form a majority of your portfolio since you have time on your hands. With age and depending on your goals, you may decide to adopt a less aggressive strategy by increasing the proportion of investments in bond ETFs.
3. Sector strategy
ETFs are a good way to get exposure to a sector that would otherwise be difficult to invest in. For example, if you want to get exposure to the technology and robotics sector, you can look at thethe ARK Autonomous Technology & Robotics ETF. Or if you want to invest in the clean energy sector, you can invest in the ALPS Clean Energy ETF. It also lets you execute a sector rotation, where you can book profits from one ETF and choose to move to another ETF depending on economic cycles. This is particularly helpful in cyclical industries.
4. International diversification
ETFs also let you diversify in global markets apart from the United States and further diversify your portfolio geographically. For example, the Invesco China Technology ETF tracks the investment results of the FTSE China Incl A 25% Technology Capped Index and gives you exposure to companies like Tencent Holdings Limited and Baidu Inc. The iShares MSCI Japan ETF tracks the investment results of an index comprising Japanese stocks and some of its holdings include the Toyota Motor Corporation and Sony Group Corporation. Combining US and international investments help you create a truly global portfolio
With a lower expense ratio than actively managed funds, ETFs are a good investment option if you are investing in the long term. On Vested’s platform, we have created Collections so that you can easily discover ETFs based on geography, themes (such as mobility, cannabis or cloud computing), and asset-class.