Are ETFs good for long term ‘buy and hold’ investing?

Are exchange traded funds good for long-term buy-and-hold investing?

Exchange traded funds can be a great strategy for long-term investors. ETFs are a simple way to diversify your Investment Portfolio and minimize risk. ETFs are actively managed by an investment professional who can modify the holdings for you.

Imagine, not having to think about your Investments. You can simply Buy and Hold an investment for the course of your investment period. 

Overtime, this investment grows and builds wealth for you.

Exchange traded funds are one of the many paths to wealth. People who are just getting started investing should highly consider ETFs.

Luckily for you, I’m going to show you why ETFs are perfect for long-term investing. By the end of this article, you will know how to find your perfect ETF. However, always seek professional help when you are unsure.

Are ETFs good for long term 'buy and hold' investing

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Are ETFs good for long term investing?

Most exchange traded funds are good for long-term investing. By looking at the history of an exchange traded fund, we can make an assumption for the future. Keep in mind, past performance does not always guarantee future results.

However, one thing we can learn from the stock market is that it tends to increase over time. Therefore, buying and holding an ETF can be a good strategy if it has shown past performance.

ETFs provide access to expensive funds

Most people can be content with just an S&P 500 exchange traded fund. The S&P 500 is an index which tracks the top 500 companies. This index has an annualized return on investment around 10 percent.

S&P 500 index

Generally, most people consider the S&P 500 to be a safe investment. However, the S&P 500 is currently valued over $3,000. Most investors cannot afford a $3,000 share price and most brokerages won’t allow you to purchase fractional shares.

So how can you invest in the S&P 500?

Exchange traded funds which track the S&P 500 are at a price significantly less than the S&P 500 itself. For example, VOO is the Vanguard S&P 500 exchange traded fund. Currently, the price of the S&P 500 fund is only $300.

As you can see, exchange traded funds give normal investors easy access to good funds.

Simplified investing

The main benefit of exchange-traded funds is that they simplify investing. You instantly have access to hundreds of stocks which are well diversified.  Depending on the fund, a fund manager will pick and choose which stocks belong to the fund.

Most of us do not know how to pick the next Amazon stock. investing in a single stock is usually considered risky. You are putting all of your money into one company. Should that company fail, you lose all or most of your money.

Now let’s say you invested that money into an exchange traded fund. Maybe this fund had 100 different stocks. Should one stock falter, your investment may hardly be noticed.

However, some ETFs have a fund manager who watches over the stocks in the fund. Therefore, if a company has signs of failing then the manager can take corrective action.

All of these great things happen without you having to watch your Investments. There’s no need for you to dive into each company and their performance.

Can you hold ETFs for short term investing?

You can hold ETFs for short-term investing, but it is not recommended. ETFs are still subject to stock market volatility. However, ETFs have a tendency to rise in value over the years.

One of the best times to invest in an ETF for short-term investing is when the market crashes. Sometimes you can earn a quick profit which is called swing trading. However, I know that it is hard to predict when the stock market will correct itself.

You should never invest for the short-term if you are going to need that money quickly. Remember, it can take years to come out of the stock market crash.

Are ETFs safer than stocks?

Most exchange traded funds are considered safer than investing in individual stocks. Exchange traded funds contain multiple stocks which provides a level of diversification. However, you need to understand the purpose of the ETF that you are investing in because some are riskier than others.

VTI is the Vanguard total stock market fund. Investing in this exchange-traded fund is considered safer as it tracks the entire U.S. stock market performance. Generally, the U.S. stock market performance should increase over the years.

Now let’s look at UPRO, a triple leveraged ETF which tracks the S&P 500. Most new investors would look to see that it is an S&P 500 ETF and purchase it. However, what makes UPRO so risky is that it is a triple leveraged ETF.

UPRO uses leverage (or debt) to try and three times the returns of the S&P 500. This means that should the S&P 500 fall 10% then your investment in UPRO would fall 30%. However, this also means that a 10% gain in the S&P 500 would generate 30% in gains for UPRO.

For most investors, the S&P 500 is a safe bet. However, should the S&P 500 fall 33% in one day then you would lose your entire UPRO investment. Essentially, your investment has gone to zero which is about three times the 33%.

I don’t mean to scare you. Generally, exchange-traded funds are a safe bet if you know which ones to pick. You should evaluate ETFs and see which ones you want to purchase for your risk tolerance.

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What are the disadvantages of ETFs?

The biggest disadvantage is not understanding what your exchange traded fund is going to do. Therefore, new investors may purchase ETFs with low diversification or unnecessary risk. Others may purchase income-producing ETFs where they could have made more income choosing their own stocks. 

Maybe you chose an energy sector ETF. Energy tends to get hit really hard when the price of oil drops. Therefore, your specific Investments could have a significant impact.

Exchange traded funds have a fund manager. Therefore, exchange traded funds have a fee associated with holding them. Depending on the brokerage, the fee can vary widely.

Dividend investors may like to purchase dividend ETFs for Simplicity. however, you could earn more income by selecting your own stocks. Obviously, you would have to know how to find and buy dividend stocks.

You also need to watch out for leveraged ETFs. We have already talked about the risk associated with owning leveraged ETFs. Your gains and losses are significantly multiplied. 

What are the best long term ETFs?

Vanguard offers some of the best long-term and low cost ETFs. The Vanguard Total stock market ETF (VTI)  and the Vanguard S&P 500 ETF (VOO) are some of the best ETFs for new investors.

Both of these exchange-traded funds are highly Diversified. Both the overall stock market and S&P 500 index are considered safer investments. People who buy and hold these Investments tend to earn money over the years.

Personally, I also like to invest in the Vanguard growth stocks ETFs (VOT, VBK). I also like to throw in some dividends (VYM) and real estate REITs (VNQ).

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Summary: Are ETFs good for long term investing?

As you can see, most exchange traded funds are good for long-term investing. However, it is important that you understand what the ETF does before you purchase it. 

Exchange traded funds greatly reduced the cost of purchasing stocks. Each ETF holds multiple stocks which provides diversification. Your Investments are simplified and a fund manager watches over certain ETFs.

Most ETFs are good for long-term investing. You can place money into an ETF for short-term investing. However, the ETF may still rise and lower in price, so don’t invest if you need the money immediately.

There are some disadvantages to ETFs. Be careful of purchasing leveraged ETFs which multiply gains and losses. You also need to understand sector-specific ETFs don’t have a high level of diversification. Dividend investors could get better yields choosing their own stocks.

New investors should probably start with an S&P 500 or total Stock Market ETF. Personally, I like the Vanguard ETFs (VOO and VTI) because they are low cost.

Remember, you should never invest yourself if you are not comfortable doing so. You can always seek professional help. 

John is the founder of TightFist Finance and an expert in the field of personal finance. John has studied personal finance for over 10 years and has used his knowledge to pay down debt, grow his investment portfolio, and launch a financial based business. He is committed to sharing content related to personal finance based on his experience in his career, investing, and path towards reaching financial independence.