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Advantages and Disadvantages of ETFs

Phil Town
Phil Town

ETF. Exchange-traded fund. A security that tracks an index and represents a basket of stocks like an index fund, but trades like a stock on an exchange, thus experiencing price changes throughout the day as it is bought and sold.

Quick question?

Is there any right time to buy into an index or sector fund?

Yes, just like stocks there are good times and bad times to buy and sell.

The advantage of Exchange Traded Funds or ETFs versus stocks is not having to find a wonderful company that meets the requirements of all the Four Ms.

Instead, you just own all of those stocks in that index or sector (both “good ones and bad ones”).

The biggest disadvantage is that the index is going to go up at the average of the stocks in the index, whereas a wonderful company that passes the Four M’s test has no such limitation.

For example: In the last five years the food retailers and wholesalers index went up 0 percent while Whole Foods went up 600 percent. That’s significant. On the other hand, if you don’t want to take the trouble to learn Rule #1 investing, your next best choice is long-term index investing.

My suggestion: Learn the principles, then repeat until rich. In other words, do you want the 600% you get from doing your homework or the 0% from doing nothing?

Learn more about the basics of investing with my Beginner's Guide to Investing in 2021. Click the button below to get started!

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