Lower Cost ETFs Can Boost Your Bottom Line Returns for high-cost mutual fund owners who want more portfolio profits. Investors who own high-cost mutual funds can increase their returns by switching to lower cost ETFs. That can happen because ETFs generally have much lower costs for sales and management due to their modern technical design, which delivers more market efficiency. In contrast, mutual funds have outdated designs with the high costs of a paper era with high management and sales structures. By switching to lower-cost ETFs, investors can prevent these costs from eating into their profits. That can boost their bottom-line returns significantly.
What You Learn: Lower Cost ETFs Can Boost Your Bottom Line Returns
For some, switching to Exchange Traded Funds or ETFs offers more than double returns! As a result, that is a change worth making!
FAQs Investors Asked About Lower Cost ETFs Can Boost Your Bottom Line Returns
These questions and answers about buying ETFs to accelerate investment returns have overlapping answers which help investors understand how stock markets, investing, and money-making interrelates.
Are ETFs a good investment?
ETFs offer excellent investment opportunities with higher returns than comparable mutual funds.
Investors can immediately boost returns and gain flexibility by switching from mutual funds to similar ETFs.
Besides excellent liquidity, ETFs offer tax advantages, a more flexible portfolio, and exposure to virtually every market, index, or investment possibility.
Still, compared to mutual funds, ETFs' most significant investment advantage remains their lower and fully disclosed costs.
How do ETFs improve returns over mutual funds?
Investing in ETFs holding the same stocks as mutual funds can deliver up to twice the returns! The design of ETFs uses technology and market efficiency to offer lower sales, administration, and management costs.
In contrast, the centuries-old design of mutual funds generates more recurring revenue streams for their sales and management teams. But because those higher costs matter, investors get lower net returns.
Investors who switch to ETFs avoid those costs, keep their investment exposure, and enjoy the higher returns of lower fees. ETF investors also benefit from more investment options, liquidity, and tax efficiency.
Can you lose all your money in an ETF?
The vast majority of ETFs hold shares or assets that offer reasonable risk and the prospect of safe returns. However, specialty ETFs are a different story. If used badly, a specialty ETF can quickly eat capital! Some specialty ETFs come with high to extreme risks. They may be highly leveraged, rebalance daily, and may hold options or futures contracts. Those are powerful specialty features that can produce spectacular results when knowledgeable investors use them well. However, in inexperienced hands, they can destroy capital! Carefully research and understand how to control the risks before considering or using any specialty ETF.
What ETF should I buy?
Exchange Traded Funds (ETFs) are easy-to-understand investment funds offering excellent investment choices that investors buy like stock.
Buy the one that is the best fit for your investment plan. ETFs hold various stocks or stock and bond combinations according to each fund's objective.
For instance, the S&P 500 ETF is a solid initial choice, as it holds all 500 stocks in the index over the long term and outperforms 80% + of the market, including large fund managers.
Other ETFs focus on specific industries, sectors, investment styles, and strategies. Although similar to mutual funds, ETFs have fewer and lower costs and restrictions, resulting in better investment returns.
Will EFTs cause the market to crash?
ETFs track or follow the market. As market followers, these transparent and liquid investments are not capable of causing a market crash.
Short-term mispricing caused by market fluctuations does affect ETFs. Most ETFs are collections of assets that also trade on the same market. As a result, any supply-and-demand-driven price change of an ETF or any underlying asset can create an instant price and liquidity mismatch.
When a liquidity mismatch affects ETFs or their underlying assets, it creates opportunities for arbitrage, which quickly realigns prices.
Although ETFs can impact market dynamics and be affected by market conditions, they are subject to price fluctuations driven by supply and demand and do not lead the market.
Are ETFs safe in a market crash?
In equity markets, ETFs are secure, with Index ETFs among the safest choices.
ETFs are not safer than stocks as they carry the same risks and follow the market value of the stocks held in each fund. The risk of each depends on the sector or industry tracked.
As for market crashes, recovery has always followed the worst minor or significant downturn throughout history.
For portfolio crash protection, well-selected ETFs can provide a diversification cushion to lessen the impact of a crash.
Crash Protection Using ETFs
When market turbulence strikes, the first question on many investors' minds is, "How safe are my investments?" Exchange-traded funds (ETFs) offer simplicity, diversification, and cost-effectiveness. Let's explore the safety of ETFs in the context of a market crash.
The ETF Positives
ETFs have grown in popularity over the past few decades for several reasons:
Diversification: An ETF is a collection of securities, often tracking a specific index, sector, or asset class. This built-in diversification spreads the risk across multiple assets rather than concentrated in a single stock. For many investors, this diversification offers a cushion against the volatility of individual securities.
Liquidity: Unlike mutual funds, priced at the end of the trading day, ETFs can trade throughout the day on stock exchanges. As a result, investors can react more quickly to market changes, buying or selling shares as needed.
Cost-Effectiveness: ETFs typically have lower expense ratios than mutual funds, making them an attractive option for long-term investors looking to minimize fees.
ETFs in a Market Crash: The Good, the Bad, and the Ugly
While ETFs offer several advantages, it's crucial to understand how they behave in a market crash. Here are some factors to consider:
Diversification: A Double-Edged Sword. The diversification safety net has its limits. An ETF heavily weighted in a specific sector or asset class that takes a significant hit could suffer considerable losses. Broad market ETFs, such as those tracking the S&P 500, provide more extensive diversification, but they, too, will decline if the entire market crashes.
Liquidity: A Mixed Blessing. The liquidity of ETFs is often touted as an advantage, allowing investors to buy and sell shares quickly during market hours. However, in a severe market downturn, liquidity can become a concern, bid-ask spreads may widen, and executing trades at a desired price could become challenging. In some cases, the market for certain ETFs might freeze up, leaving investors unable to exit quickly.
Market Risk: No Immunity Here. ETFs are subject to market risk, meaning they will likely decline in value during a market crash. For instance, if you hold an ETF that tracks a broad market index, such as the S&P 500, the value of that ETF will reflect the performance of the index. During a market crash, even a well-diversified ETF will see its value drop as the overall market declines. The key here is to remember that ETFs are not a safeguard against market risk—they mirror the performance of the underlying assets, whether good or bad.
Counterparty Risk: A Hidden Threat. Some ETFs, particularly those that use derivatives or leverage, come with counterparty risk. That means that the ETF depends on the financial stability of other institutions to fulfill their commitments. During a significant market decline, a default on a counterparty produces a loss for investors.
Tracking Error: The Unexpected Discrepancy. Tracking error refers to the difference between the performance of the ETF and the index it aims to replicate. During volatile markets, this discrepancy can become more pronounced. A significant tracking error means that your ETF may not perform as expected, which could be a concern during a market crash when every percentage point counts.
ETF Consequences During a Market Crash
The answer is nuanced. ETFs are generally safer than individual stocks during a market crash due to their diversification and the fact that they track broader market indices or sectors. However, they are not immune to market downturn risks. The degree of safety an ETF offers depends on the underlying assets, structure, and the severity of the market crash.
Consequently, long-term investors use ETFs as a sound investment choice, even during market downturns. History has shown that markets recover over time, and those who stay invested reap rewards. However, it's essential to choose your ETFs wisely, understand the risks, and prepare for short-term volatility. While ETFs provide a layer of safety in the form of diversification, they are not a foolproof shield against market crashes.
Considerations before buying an ETF
Choosing an ETF depends on investment goals, risk tolerance, time horizon, and market conditions. Here are a few considerations to help guide your decision:
1. Investment Goals
Decide if you're looking for growth, income, or a combination.
2. Risk Tolerance
Some ETFs are more volatile, so know your risk tolerance before deciding.
3. Diversification
Consider ETFs exposed to diversified assets or sectors to spread risk.
4. Expense Ratio
Pick lower expense ratio ETFs for higher net returns.
5. Performance
Good past results can't assure future returns but are a positive indication.
6. Market Conditions
Consider current market trends and economic outlook to select an ETF.
Popular ETF categories include:
Broad Market ETFs
Major market indexes track the S&P 500 or total market indexes.
Sector ETFs
Focuses investing in sectors like technology, healthcare, or energy.
Bond ETFs
Investments in various bonds provide income and lower volatility.
International ETFs
Stock or bond exposure outside an investor's home market.
Smart Beta ETFs
Uses technical indicators designed to outperform market indexes.
The first step to any good investment decisions is conducting thorough research or seeking qualified advise so decisions align with investment goals and risk tolerance.
Investors lower costs while keeping market exposure
An ETF with exactly the same holdings as a mutual fund can double investor returns! And even greater improvements are possible! In most cases, ETFs have a huge cost advantage over mutual funds. And lower costs make all the difference for better investment returns!
The key point in the comparison between mutual funds and ETFs is the real net liquidated return. That means the money that actually gets into the investor’s pocket after all costs. So investors must be aware, the real net returns are not the progressive annual numbers mutual funds have reported. In fact, some mutual fund company reports are close to nonsense. Too often, mutual fund purveyors obscure the real costs and they do that on purpose. Unfortunately, regulators let this clever legal ripoff scheme continue.
But informed investors do not have to put up with it. In fact, superior investors that inform themselves can take action to avoid these financial traps. But be warned, few investors are capable of seeing through the dense smoke. It seems forever, mutual fund companies have done an excellent job of keeping costs well obscured. That happens because the mutual fund and financial service industry enjoy the financial feast provided by high fees. From top to bottom, mutual fund players feast on this booty. And because so many dine on that money, there is little chance of any change. That means, year after year, little change happens to the ripoff scheme.
Times do change… but not now or fast
Anyone wanting change in the mutual fund scheme has a mountain of work cut out for them. And it will be up to you, any mutual fund investor, to make enough noise. Regulators are well aware of the issue. But they will do little. In fact, some regulators are chattering as they did the year before and the year before that, and…well you get the idea! Don’t expect much to happen. Although proposed regulations require clear reports on compensation and performance, not much of substance has happened.
Like other sellers, Canadian banks harvest huge returns from mutual fund-related fees. So that revenue accounts for much of the stellar banking and wealth management sector returns. And that is the case across the wealth management sectors. There, the returns are outstanding for the sellers and service providers. However, the net returns for investors typically show underperformance across the majority of mutual funds. That happens because those fat fees come out of investor pockets. So banks will fight any proposed change to protect those fat profits. As always, banks want nothing to do with full, plain, or clear disclosure. They prefer to have the returns in their pockets rather than those of the investor.
To make sure that keeps happening, banks turn loose legions of lawyers to fight any change. So any possible change will take some time. Just as they want it. That will happen because those fine legal minds will see to it that obscuring full costs remains legal. As a result, don’t expect any real help from regulators.
If they were required, full clear cost reports would shock many mutual fund holders. But that is a dream. However, it would benefit everyone except the financial advisors milking mutual fund fees from clients. It could mean some awkward meetings between advisors and clients. But the market, not regulators offers hope to meet the needs of the investing public. And that gives investors an easy way out of the fee jungle.
The ETF Difference
A market innovation, ETFs offer all the advantages of mutual funds at a fraction of the cost. And they provide far better reports to investors. So take advantage, and avoid the outrageous cost of mutual funds. Do that by buying ETFs for a practical, available, and lower-cost alternative.
That’s a big difference! ETFs have a huge cost advantage that gets passed on to investors as better returns. That result means an ETF with a sharp cost reduction puts the difference into your pocket. Do that for a few years and the compound difference has a huge impact on your wealth!
Most basic ETF holdings are very much like mutual funds. That means ETFs can give exactly the same market exposure. And as the ETF industry grows, compared to mutual funds, ETFs offer greater numbers of market opportunities. As a result, for those holding the same equities, the performance and participation will be the same. But at a fraction of the costs for a mutual fund and investors get the difference put on their bottom line.
As with mutual funds, there are thousands of ETFs offered. And more are coming all the time. As a result, for investors ETFs present two major and important differences:
- Public Listing: ETF shares or units trade on stock exchanges
Management Expense: ETFs have exceptionally low costs
1. Public Listing
Being listed means that ETF shares trade like any stock on a stock exchange. That makes them easy for any investor to buy. It also makes them easy to sell. Unlike mutual funds, any buyer or seller can see minute-by-minute price action on exchanges. At best, mutual funds price once a day in a process only seen by the mutual fund company personal.
Investors can buy or sell their full position anytime during market hours. There are no selling restrictions or limits as happens with some mutual funds.
Any investor can gain access to the market with an investment account. In Canada, that means dealing with one of the bank-owned dealers or the handful of independents. In America, retail investors have a much wider choice among dealers to select from.
The markets of both nations offer investors many choices. In future conversations, we discuss the process of selecting a dealer or financial advisor.
The best part of this is avoiding the sales structure and costs of the mutual fund industry. In the case of ETFs those outdated structures and old-fashioned sale methods can be completely avoided. To the advantage of investors, that avoids the costs as well. Most importantly, missing the annual recurring costs.
2. Management Expenses
The design and structure of mutual funds began centuries ago. Before electronics, their base was built on paper records and face-to-face transfers. The deal structure fits the times. A cutting-edge idea for that time involved man people and all the associated costs. That meant management, bureaucracy, and space to accommodate them all. All that brings costs.
In contrast, ETFs are a product of the digital age. They have cost and efficiency advantages that lower expenses. Their sales channel bypasses the obsolete mutual fund distribution model. They need few people, little space, and a simple management structure. Those differences bring far less cost.
You can take advantage of these huge cost savings! Put the ETF advantages to work building your wealth. The next lesson in this course details those huge cost differences. The details will shock your wallet!
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Introduction to Money Choices That Grow Wealth Lesson 1
3 Stock market approaches Lesson 2
Income, value and growth investing Lesson 3
3 Distinct investing approaches Lesson 4
Aggressive trading chases profit Lesson 5
Momentum investing trading play Lesson 6
Speculation returns for big risks! Lesson 7
Risks complicate spectacular returns Lesson 8
Speculation failures improve investing Lesson 9
Middle trader thinking differs Lesson 10
Investing trading and speculating differ Lesson 11
Buying ETFs accelerates returns Lesson 12
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