ETF investment strategy

ETF investment strategy for beginners. All you need to know

ETF investment strategy is new to India. In fact, the first successful ETF was introduced in 1993 in the United States to monitor the Standard & Poor’s 500 Index (S&P 500), and it is still one of the most popular ETFs today. In India, the first ETF to track the Nifty 50 Index came to the market in 2001. ETFs are a low-cost, low-risk way to invest. 

Since it tracks a specific index, such as the NIFTY 100 or S&P 500, and is passively managed. An exchange-traded fund (ETF) is similar to an index mutual fund.  

However, today’s market has a large number of actively managed ETFs. ETFs, unlike index funds, are marketable securities that may be bought, sold, and traded at an exchange throughout the day, just like any other corporate stock. 

Benefits of investing in ETFs

  1. ETFs offer liquidity as they are tradable securities on the exchange; 
  1. ETFs are very cost-efficient compared to their mutual fund counterparts due to their structure and functioning;
  1. ETFs offer unparalleled flexibility due to traceability advantages; 
  1. ETFs offer diversification to the portfolio; 
  1. ETFs are single transaction securities; when an investor buys a mutual fund, he or she buys a basket of equities made up of small shares spread across various assets. When an ETFs are bought in a single transaction, it is akin to owning a tiny portfolio it is beneficial to investors who are keeping track of their performance; 
  1. Unlike some mutual funds, ETFs do not have lock-in periods. 
  1. ETFs are tax-efficient 
  1. Passive management helps get transparent returns akin to the underlying index.  
ETF investment strategy
Source: Pixabay

Four ETF investment methods

Cost-per-dollar Averaging 

You acquire assets worth a specific amount of money regularly, regardless of how the asset’s price changes. Even if it’s a modest amount, if you’re new to the US investing, you should strive to save a regular amount in an ETF or a set of ETFs every month.  

This aids in the development of saving discipline. The goal is to spend time in the market rather than trying to time it. 

For instance, using DCA, a $200,000 investment in shares can be made over eight weeks by investing $25,000 each week in the same manner. The trades for lump-sum investing and the DCA approach are in the table below: 

  DCA @ $25000 per week Lumpsum
Week Share price No of shares purchased Share price No of shares purchased
1 85 294 85 2353
2 86 291    
3 83 301    
4 81 309    
5 82 305    
6 78 321    
7 80 313    
8 82 305    
Total shares purchased   2437   2353
Average share price 82   85  

The entire amount invested is $200,000, with 2,353 shares purchased as a lump-sum transaction. On the other hand, the DCA strategy purchases 2,437 shares, a differential of 84 shares worth $6,888 at the $82 average share price.  

As a result, DCA can raise the number of shares purchased when the market is down and decrease the number of shares purchased when the market is up. 

Asset Allocation 

Simply put, you should not invest all your money in a single asset group. Instead, you spread it over various asset classes, such as equities, bonds, and commodities.  

ETFs can assist a novice in putting together a basic portfolio allocation. The asset allocation you make should be based on your risk tolerance. When you’re in your twenties, for example, stock ETFs may make up the bulk of your portfolio as you have more time on your hands.  

You might choose to implement a less aggressive policy as you age and your goals change by increasing the proportion of your assets in bond ETFs. 

Sector Strategy 

ETFs are a great method to gain access to a sector that otherwise would be hard to enter. For example, the ARK Autonomous Technology & Robotics ETF can help you gain exposure to the technology and robotics sectors.  

You can also invest in the ALPS Clean Energy ETF if you wish to invest in the clean energy sector. It also allows you to perform a sector rotation, in which you can earn gains from one ETF and switch to another based on economic cycles – this is especially useful in cyclical businesses. 

Global Diversification 

ETFs also allow you to diversify your portfolio regionally and in global markets other than the United States. The Invesco China Technology ETF, for example, tracks the performance of the FTSE China Incl Index.  

Tencent Holdings Limited and Baidu Inc. are the firms represented in this 25% Technology Capped Index.  

The iShares MSCI Japan ETF monitors the performance of an index of Japanese stocks, with Toyota Motor Corporation and Sony Group Corporation among its holdings. Investing in the United States and other countries allows you to build a global portfolio. 

ETFs are a solid long-term investment alternative because they have a lesser expense ratio than active funds. Hence going with them makes the most sense.

Consult an expert advisor to get the right plan for you

Add comment

Your email address will not be published.