RETIREMENT PLANNING
How to Invest in ETFs
written by Mike Ballew|April 10, 2022
An ETF (Exchange Traded Fund) is a type of investment that consists of multiple stocks or bonds. ETFs can include the entire stock market or specific segments such as energy, consumer staples, or real estate. ETFs offer several advantages over mutual funds and individual stocks.
ETFs came into being back in the 90s and have become one of the most popular forms of investments among individual and institutional investors. There are over 7,000 ETFs totaling approximately $10 trillion in assets.
ETF Advantages
The primary advantage of ETFs over investing in individual stocks is diversification. When you invest in an individual stock such as McDonalds or Boeing, you are exposing yourself to company-specific risks. McDonalds might have a bad quarter or Boeing might produce a passenger jet that flies straight into the ground. Surprises like that can have a devastating effect on your portfolio. ETFs spread your investment over multiple companies so if something goes wrong with one of them the overall effect is muted.
ETFs do not have a patent on diversification, mutual funds also consist of multiple companies. So why do we need ETFs? Mutual funds are less versatile than ETFs. You can trade an ETF like a normal stock. You can buy and sell ETFs as often as you like anytime you like. Mutual funds are limited to one trade per day and only at the market close.
Popular ETFs
With over 7,000 to choose from, how do you decide which ETF is right for you? Let’s look at a few of the most popular ones. SPDR S&P 500, ticker symbol SPY, tracks the Standard & Poor index of 500 leading U.S. companies. These are household names like Proctor & Gamble, Visa, Exxon Mobil, and Coca-Cola. Another popular ETF is ProShares UltraPro QQQ, ticker symbol TQQQ. It tracks 100 major U.S. corporations in the NASDAQ, many of which are technology-related.
One of the neat things about investing in ETFs is you can play the short side. If you are not familiar with shorting a stock, it means to bet against it. Short positions make money when a stock goes down. Conversely, shorts lose money when a stock goes up.
According to ETF Database, the third most popular ETF is a short: ProShares UltraPro Short QQQ, ticker symbol SQQQ. It's basically the opposite of TQQQ, it shorts the NASDAQ. If you think tech companies like Alphabet (Google), Tesla, and Netflix are overrated, SQQQ might be the one for you.
';// shuffle ad locationsfunction shuffle(array){let currentIndex = array.length,randomIndex;while(currentIndex > 0){randomIndex = Math.floor(Math.random() * currentIndex);currentIndex--;[array[currentIndex], array[randomIndex]] = [array[randomIndex], array[currentIndex]];}return array;}var ad_array = [1,2];shuffle(ad_array);// place shuffled adsvar this_div;this_div = "in_content_" + ad_array[0] + "_728x90";document.getElementById(this_div).innerHTML = this_ad_1a;this_div = "in_content_" + ad_array[0] + "_300x250";document.getElementById(this_div).innerHTML = this_ad_1b;this_div = "in_content_" + ad_array[1] + "_728x90";document.getElementById(this_div).innerHTML = this_ad_2a;this_div = "in_content_" + ad_array[1] + "_300x250";document.getElementById(this_div).innerHTML = this_ad_2b; });
Leveraging in the financial world means using debt to amplify gains. Don’t worry, you don’t have to fill out a loan application or anything. Leveraged ETFs use financial derivatives behind the scenes to achieve the effect. Leveraged ETFs provide a 2:1 or 3:1 ratio typically expressed as 2x or 3x. Direxion S&P500 Bull 3x (SPXL) is an example of a leveraged ETF. SPXL increases at a rate 3 times that of the S&P 500. If the S&P 500 goes up 10% over a given period of time, an investment in SPXL will increase by 30%. It’s important to note that it also goes down at a 3x rate.
Leveraged short ETFs allow you to short the market at a 2x or 3x rate. Direxion S&P500 Bear 3x (SPXS) is a 3x short of the S&P 500. If the S&P 500 decreases 10% over a given period of time, an investment in SPXS will increase by 30%. If you had invested $250,000 in SPXS back when the pandemic first started in February 2020, just one month later it would have been worth over a half million dollars.
ETFs can play an important role in your retirement savings. They enable you to trade on specific market sectors based on what you believe is happening in the economy. If you can buy and sell stocks, you can trade ETFs. All you need is an online brokerage account.
Photo credit: PixabayThe Eggstack Blog will never post an article influenced by an outside company or advertiser. Our mission is to help you overcome uncertainty about retirement planning and inspire confidence in your financial future.
