Are ETFs a good investment for long term?
ETFs can be a great investment for long-term investors and those with shorter-term time horizons. They can be especially valuable to beginning investors. That's because they won't require the time, effort, and experience needed to research individual stocks.
Why ETFs are good for long-term investors. ETFs can be great building blocks for long-term investors. They can provide broad exposure to market sectors, geographies, and industries and help investors quickly diversify their portfolios while reducing their overall risk profile.
Holding period:
If you hold ETF shares for one year or less, then gain is short-term capital gain. If you hold ETF shares for more than one year, then gain is long-term capital gain.
For instance, some ETFs may come with fees, others might stray from the value of the underlying asset, ETFs are not always optimized for taxes, and of course — like any investment — ETFs also come with risk.
Exchange-traded funds (ETFs) are ideal for beginning investors due to their many benefits, which include low expense ratios, instant diversification, and a multitude of investment choices. Unlike some mutual funds, they also tend to have low investing thresholds, so you don't have to be ultra-rich to get started.
- Vanguard S&P 500 ETF (VOO)
- Schwab U.S. Small-Cap ETF (SCHA)
- Invesco QQQ Trust (QQQ)
- Vanguard High Dividend Yield Index ETF (VYM)
- Vanguard Total International Stock ETF (VXUS)
- Vanguard Total World Stock ETF (VT)
- iShares Core U.S. Aggregate Bond ETF (AGG)
Hold ETFs throughout your working life. Hold ETFs as long as you can, give compound interest time to work for you. Sell ETFs to fund your retirement. Don't sell ETFs during a market crash.
The choice comes down to what you value most. If you prefer the flexibility of trading intraday and favor lower expense ratios in most instances, go with ETFs. If you worry about the impact of commissions and spreads, go with mutual funds.
Q: How does the wash sale rule work? If you sell a security at a loss and buy the same or a substantially identical security within 30 calendar days before or after the sale, you won't be able to take a loss for that security on your current-year tax return.
Visit your My NerdWallet Settings page to see all the writers you're following. RDIV and SPYD have some of the highest yields of any high-dividend ETF. It's possible to live off the income from high-dividend ETFs, but it may take some planning.
Why I don't invest in ETFs?
ETFs are most often linked to a benchmarking index, meaning that they are often not designed to outperform that index. Investors looking for this type of outperformance (which also, of course, carries added risks) should perhaps look to other opportunities.
ETFs may close due to lack of investor interest or poor returns. For investors, the easiest way to exit an ETF investment is to sell it on the open market. Liquidation of ETFs is strictly regulated; when an ETF closes, any remaining shareholders will receive a payout based on what they had invested in the ETF.
Theoretically, for exotic ETFs, yes — but as a practical matter highly unlikely. And for broad market ETFs that track something like the S&P 500 Index the probability of going to zero is, well, about zero. Every stock in the index would have to go to zero.
Stock-picking offers an advantage over exchange-traded funds (ETFs) when there is a wide dispersion of returns from the mean. Exchange-traded funds (ETFs) offer advantages over stocks when the return from stocks in the sector has a narrow dispersion around the mean.
You expose your portfolio to much higher risk with sector ETFs, so you should use them sparingly, but investing 5% to 10% of your total portfolio assets may be appropriate. If you want to be highly conservative, don't use these at all.
ETF | Assets Under Management | Expense Ratio |
---|---|---|
Invesco QQQ Trust (QQQ) | $254 billion | 0.20% |
Vanguard Information Technology ETF (VGT) | $70 billion | 0.10% |
VanEck Semiconductor ETF (SMH) | $16.3 billion | 0.35% |
Invesco S&P MidCap Momentum ETF (XMMO) | $1.6 billion | 0.34% |
Experts agree that for most personal investors, a portfolio comprising 5 to 10 ETFs is perfect in terms of diversification.
Symbol | Name | 5-Year Return |
---|---|---|
OEF | iShares S&P 100 ETF | 14.73% |
SPHB | Invesco S&P 500® High Beta ETF | 14.58% |
SPYG | SPDR Portfolio S&P 500 Growth ETF | 14.40% |
VOOG | Vanguard S&P 500 Growth ETF | 14.38% |
- 10-year return: 24.37%
- Assets under management: $10.9B.
- Expense ratio: 0.35%
- As of date: November 30, 2023.
It's relatively simple: You add up all of your investments, and withdraw 4% of that total during your first year of retirement. In subsequent years, you adjust the dollar amount you withdraw to account for inflation.
What if I invested $1000 in S&P 500 10 years ago?
According to our calculations, a $1000 investment made in February 2014 would be worth $5,971.20, or a gain of 497.12%, as of February 5, 2024, and this return excludes dividends but includes price increases. Compare this to the S&P 500's rally of 178.17% and gold's return of 55.50% over the same time frame.
In 1980, had you invested a mere $1,000 in what went on to become the top-performing stock of S&P 500, then you would be sitting on a cool $1.2 million today.
ETFs and index mutual funds tend to be generally more tax efficient than actively managed funds. And, in general, ETFs tend to be more tax efficient than index mutual funds. You want niche exposure. Specific ETFs focused on particular industries or commodities can give you exposure to market niches.
ETFs offer numerous advantages including diversification, liquidity, and lower expenses compared to many mutual funds. They can also help minimize capital gains taxes. But these benefits can be offset by some downsides that include potentially lower returns with higher intraday volatility.
Mutual funds and ETFs may hold stocks, bonds, or commodities. Both can track indexes, but ETFs tend to be more cost-effective and liquid since they trade on exchanges like shares of stock. Mutual funds can offer active management and greater regulatory oversight at a higher cost and only allow transactions once daily.
References
- https://www.schwab.com/etfs/mutual-funds-vs-etfs
- https://www.investopedia.com/financial-edge/0113/7-easy-to-understand-etfs-to-replace-a-savings-account.aspx
- https://www.schwab.com/learn/story/generating-income-with-etfs-what-you-need-to-know
- https://time.com/personal-finance/article/stocks-vs-etfs/
- https://www.investopedia.com/ask/answers/06/canindexfundsgounder.asp
- https://www.bankrate.com/investing/best-etfs/
- https://money.usnews.com/investing/articles/best-etfs-to-buy
- https://www.pillsburylaw.com/images/content/3/2/v2/3201/C-S-Advisory-07-22-2010-II.pdf
- https://money.usnews.com/funds/etfs/rankings/large-growth
- https://www.schwab.com/learn/story/etfs-how-much-do-they-really-cost
- https://www.investopedia.com/articles/investing/110314/key-differences-between-etfs-and-mutual-funds.asp
- https://www.investopedia.com/ask/answers/09/etfs-vs-mutual-funds.asp
- https://www.investopedia.com/articles/investing/030315/etfs-characteristics-shortterm-trading.asp
- https://www.composer.trade/learn/what-is-a-90-10-portfolio-strategy
- https://www.nerdwallet.com/article/investing/high-dividend-etfs
- https://www.quora.com/Can-a-ETF-price-go-to-zero
- https://www.investopedia.com/articles/personal-finance/022216/put-10000-sp-500-etf-and-wait-20-years.asp
- https://www.investmentfundlawblog.com/resources/investments-by-funds/investments-investment-companies/
- https://www.getsmarteraboutmoney.ca/learning-path/etfs/how-exchange-traded-funds-etfs-work/
- https://www.investopedia.com/articles/mutualfund/07/etf_downside.asp
- https://www.investopedia.com/articles/investing/020916/etfs-can-be-safe-investments-if-used-correctly.asp
- https://www.fidelity.com/learning-center/investment-products/etf/tax-rules-for-losses-etfs
- https://www.cnbc.com/select/what-are-etfs-should-you-invest/
- https://www.stash.com/learn/how-much-should-i-be-investing/
- https://www.investopedia.com/articles/investing/041615/6-etfs-are-recessionproof.asp
- https://www.investopedia.com/articles/stocks/09/buying-stock-or-etf.asp
- https://www.cnbc.com/2024/01/22/as-sp-500-enters-bull-market-heres-what-to-know-before-you-invest.html
- https://m.economictimes.com/markets/stocks/news/the-optimal-number-of-mutual-funds-that-you-should-hold-in-your-portfolio/articleshow/99009145.cms
- https://finance.yahoo.com/news/invested-1000-p-global-decade-133005715.html
- https://www.nerdwallet.com/article/investing/what-is-an-etf
- https://www.fool.com/investing/general/2013/09/21/the-best-performing-stock-on-the-sp-500-since-1980.aspx
- https://www.investopedia.com/articles/exchangetradedfunds/09/etf-out-of-business.asp
- https://www.fool.com/investing/how-to-invest/index-funds/safest-index-funds/
- https://finance.yahoo.com/news/warren-buffett-reveals-instructions-invest-163624653.html
- https://www.financialsymmetry.com/5-reasons-to-consider-not-only-investing-in-the-sp-500-ep-209/
- https://www.thestreet.com/etffocus/trade-ideas/the-only-leveraged-etf-that-i-would-buy-hold-long-term
- https://investor.vanguard.com/investor-resources-education/taxes/how-mutual-funds-etfs-are-taxed
- https://www.investopedia.com/articles/exchangetradedfunds/11/building-an-etf-portfolio.asp
- https://www.investopedia.com/terms/e/etf.asp
- https://curvo.eu/article/etf-risk
- https://www.etf.com/sections/etf-basics/10-best-performing-etfs-last-10-years
- https://www.schwab.com/learn/story/primer-on-wash-sales
- https://www.bankrate.com/investing/stocks-vs-etfs/
- https://www.blackrock.com/us/individual/literature/fact-sheet/sma-target-allocation-70-30-etf-factsheet.pdf
- https://www.bankrate.com/investing/bond-etfs-portfolio-benefits/
- https://www.trackinsight.com/en/education/how-many-etfs-should-you-own
- https://www.linkedin.com/pulse/4-3-2-1-approach-financial-freedom-royston-tan-%E9%99%88%E9%9F%A6%E9%BE%99-chfc-asep-ibfa-
- https://www.bankrate.com/investing/what-is-an-expense-ratio/
- https://www.investopedia.com/articles/investing/111115/5-reasons-choose-mutual-funds-over-etfs.asp
- https://etfdb.com/compare/highest-5-year-returns/
- https://www.ally.com/stories/invest/what-are-inverse-etfs/
- https://www.investopedia.com/why-bond-etfs-go-down-8303231
- https://www.investopedia.com/articles/investing/090115/7-best-etf-trading-strategies-beginners.asp
- https://www.etfcentral.com/etf-u/guides/how-many-etfs-should-i-own
- https://www.securities-administrators.ca/investor-tools/understanding-your-investments/etf-facts/
- https://money.usnews.com/investing/articles/best-etfs-to-buy-for-long-term-investors
- https://www.fidelity.com/learning-center/investment-products/etf/risks-with-etfs
- https://www.investopedia.com/articles/investing/121515/why-3x-etfs-are-riskier-you-think.asp
- https://www.schwab.com/learn/story/etf-vs-mutual-fund-it-depends-on-your-strategy
- https://www.bogleheads.org/wiki/Three-fund_portfolio
- https://www.investopedia.com/articles/exchangetradedfunds/11/advantages-disadvantages-etfs.asp
- https://www.nerdwallet.com/article/investing/sp-500-etfs
- https://www.fidelity.com/learning-center/trading-investing/trading/trading-differences-mutual-funds-stocks-etfs
- https://investor.vanguard.com/investor-resources-education/retirement/income-make-the-most-of-retirement
- https://www.investopedia.com/ask/answers/163.asp
- https://www.schwab.com/learn/story/3-ways-to-build-all-etf-portfolio
- https://www.forbes.com/advisor/investing/best-short-term-bond-etfs/
- https://www.fidelity.com/learning-center/investment-products/etf/which-is-right-for-you
- https://www.nasdaq.com/articles/can-you-actually-retire-a-millionaire-with-etfs-alone-5
- https://www.fool.com/investing/how-to-invest/etfs/best-long-term-etfs/
- https://www.titan.com/articles/etf-drawbacks
- https://www.nerdwallet.com/article/investing/how-to-invest-in-etf-exchange-traded-fund
- https://www.etf.com/etf-education-center/etf-basics/what-risks-are-there-in-etfs
- https://www.canstar.com.au/investor-hub/buy-sell-hold-etfs/
- https://www.investopedia.com/articles/investing/120415/how-dividendpaying-etfs-work.asp
- https://www.investopedia.com/articles/etfs-mutual-funds/061416/biggest-etf-risks.asp
- https://www.investopedia.com/articles/exchangetradedfunds/08/etf-taxes-introduction.asp
- https://www.investopedia.com/articles/investing/020116/when-right-time-change-mutual-funds-etfs.asp
- https://www.nerdwallet.com/article/investing/how-to-invest-in-sp500
- https://www.schwab.com/learn/story/beyond-4-rule-how-much-can-you-spend-retirement
- https://www.fidelity.com/learning-center/investment-products/etf/basic-rules-for-gains-etfs