Exchange Traded Funds – How Dollar Cost Averaging Can Make You Money In The Long Term

Exchange-traded can be seen as a mutual fund that trades like a stock. It represents a pool of stocks reflecting an index. The ETFs try to imitate the return on indexes but there is no assurance that they will do so precisely. However, an ETF is not a mutual fund and it trades like any other company on a stock exchange. The price of an ETF can change all through the day, wavering with the supply and demand whereas the mutual funds are traded once during the day. Mutual funds also require NAV to be calculated for trading. Another distinction between mutual funds and ETFs is cost. Mutual funds have a greater expense ratio as compared to mutual funds. A portfolio manager does not monitor the assets under ETF so no expenses are charged. Thus, investors with ETFs can put in more of their money into actual investments.

The major market indexes represent only a part of the numerous investment chances that ETFs offer. You can supplement your principal investments with more dedicated ETFs, which present admission into an extensive network of investing openings. ETFs are now pursuing indexes in about every area, including biotechnology, healthcare, gold and …more. By adding ETFs to your asset allocation, you add an assertive enhancement to your asset allocation. With ETFs you can always follow active trade techniques. For example, if you have a stock that, you think, might stumble and gold is set to hike, you can trade out of your stock position and shift into gold in a negligible time during any time of the trading day.

A number of investment policies can be used with ETFs, including investing in commodities, sector alternation, stocks and other portfolio diversification investments. Most of these strategies that were winning while investing in mutual funds also work fine with ETF. One such strategy or investment technique is dollar-cost averaging.

The concept at the back of dollar-cost averaging is that the investor will buy lesser shares when prices are high but more when prices decline by investing a preset sum of money at regular intervals. Finally, this will force the average value per share down to lower and lower levels. Dollar-cost averaging is a long-established investment strategy and it averts investors from investing large sums of money at incorrect time. Dollar-cost averaging engrosses small amount of investments so the policy works for low transaction costs. Investors in mutual funds tend to use dollar-cost averaging strategy even though the mutual fund transaction costs are quite high. So it is obvious that with low expense ratio of ETF, the dollar-cost averaging would work still better.

The dollar-cost averaging theory is not essentially attached to small investments, what counts is the stable ones at regular intervals. Provided that the investor keeps on purchasing shares with the same dollar amount each time, the dollar-cost averaging policy should nevertheless work and the average cost per share would decrease with time. The transaction costs of ETFs make smaller investments unreasonable as they lessen investment execution. Now there are two likely solutions for owners of ETFs who want to work on the dollar-cost averaging strategy. They can make bigger investments at smaller regular intervals or they can set aside the money and purchase shares once or twice per year. The dollar-cost averaging strategy is a confirmed frontrunner and ETFs owners can use it efficiently if they invest larger amounts at regular intervals. Even when the investment amounts are the same and the intervals are set, the dollar-cost averaging policy works well with ETFs.


Joel Teo