ETFs Enjoy Flexibility of Strategies as Well
Through ETFs, virtually any type of asset that one wishes to take a position in is available at your fingertips, in a way that allows for great flexibility as far as one’s investment or trading strategy is concerned.
Should one wish to invest long term in an ETF, one simply holds their position in it for whatever length of time that is desired, all the while allowing for positions to be closed with the click of a mouse.
If the intention and the strategy is aimed at shorter term trading, one may execute such a plan as one wishes with ETFs, and there are many that trade ETFs on a very short term basis, holding positions for as little as a few minutes.
This is the case with stocks as well, although normally you would have to trade stocks individually, where ETFs allow you to do this with baskets of stocks. Mutual funds offer baskets of stocks but they can’t be traded in real time like ETFs can, and aren’t really suited to shorter term trading, due to the slippage involved. When you have to wait until the next day to close your position, this lag makes mutual funds really only suitable for longer term investing.
ETFs Do Not Limit You to the Long Side
In this sense, ETFs represent the best of both worlds, with all of the benefits of a fund, and all of the flexibility of trading an individual stock. This includes the ability to take both long and short positions in a fund, something that mutual funds do not offer at all.
The biggest impediment, by far, with mutual funds is that they limit investors to the long side only, where the only option is taking positions that benefit you when the price of the asset rises, and hurt you when prices decline.
The value of assets both move up and down at various times, and these trends can be of a significant length, even running for as long as several decades. If the assets you are interested in are in a downtrend, and especially if the downtrend is an extended one, and you are limited by only taking long positions, this means that you cannot profit and will instead most likely see the value of your investments decline during these periods.
Although some assets like stocks do tend to exhibit very long upward trends, they are certainly not immune from downtrends of various lengths, with some being very significant in magnitude as well.
Some assets may not even enjoy very long term growth, like commodities or bonds, and it’s even more important to have the flexibility of not being just limited to taking long positions in these assets. In all cases though, trends to vary according to a number of different conditions, with the primary one being one of supply and demand, and it’s quite important to be able to take advantage of both uptrends and downtrends, and not just uptrends.
Who Does This All Matter To?
A lot of individual investors prefer what we could call a plain vanilla approach to investing, where they seek the utmost of simplicity in just investing in the stock market long term and staying long and fully invested. They don’t wish to try to time their positions or make any decisions at all about their investments other than how much to invest.
ETFs allow for this strategy to be implemented very simply, as one can just invest in something like a major U.S. stock index, or whatever else the investor may choose to put their money in, and the position is then just held as long as desired.
If an investor is looking to invest small amounts regularly though, mutual funds do offer the advantage of not having to pay a commission each time, with no load mutual funds anyway, as opposed to placing monthly trades for instance for small amounts invested in a fund.
This can be enough of an issue to make mutual funds much more desirable than ETFs for this style of investing, and mutual funds indeed do have their place with many investors. With ETFs, one would need to save up these amounts and make larger purchases, although in a favorable market this may reduce one’s performance, by having funds sitting in cash waiting to accumulate enough to invest versus being invested in a fund all the while.
This is the only major concern with ETFs, although this does make ETFs more suitable for short and medium term investing than long term. One is not limited by just going with either a mutual fund or an ETF, as one can for instance take a significant position in an ETF where commission costs are negligible, and use a mutual fund for smaller, scheduled contributions.
With those who are looking to time their investments, regardless of the time frame one seeks to do this in, will enjoy significant benefits with ETFs over mutual funds, as ETFs are much more suited to trading.
This is especially the case if one seeks to play both sides of a market, looking to trade with trends and capitalize on them regardless of their direction. This is the most efficient form of investing as it actually involves choosing and managing your positions based upon market behavior.
This is supposed to be the goal with any investing, although with long term short positions, the trend that is sought to be taken advantage of is the very long uptrend only, where other strategies involve taking advantage of other trends of shorter duration as they manifest.
Those who wish to be more adventurous with their investments, not only looking to time the stock market and defer some of the risk by diversifying with bonds, but also seek out investing in other types of assets, will be well served by the structure and opportunities of ETFs.
With a wider variety of assets and funds to trade, ETF investors and traders are able to view and assess the desirability of investing in a number of other types of funds. While the typical behavior of an asset over the long term, such as stocks, does matter somewhat, how the asset is performing now and where it is headed matters much more.
With a greater selection of things to take positions in, along with a means of entering and exiting them at will, this can serve to expand the number of opportunities for investors and traders alike, particularly those who are prepared and willing to take advantage of particular trends in particular assets, whether the movement is either up or down.
When we combine this with the flexibility of being able to use any number of investment and trading strategies across any time frame one chooses, this does make ETFs a very desirable way to trade in securities among those who seek this enhanced flexibility.