How to Make Money with ETFs
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ETFs Guide for Canadian Investors: Find the best way to invest in ETFs with low fees, low risk & high satisfaction.
Topic: ETFs
September 11, 2023|by Pat McKeough
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To determine when to buy ETFs, some investors use technical analysis and other tools. But you need to dig deeper.
Investors often wonder: what is a good entry point when purchasing a stock or an ETF?
The first question before asking when to buy an ETF, when to when to buy etfs, is whether an exchange traded fund investment is right for your portfolio. An ETF investment is one of the most popular and most benign investing innovations of our time. ETF investments are a little like conventional mutual funds, but with two key differences.
How to Make Money with ETFs
Learn everything you need to know in 'The ETF Investor's Handbook' for FREE from The Successful Investor.
ETFs Guide for Canadian Investors: Find the best way to invest in ETFs with low fees, low risk & high satisfaction.
First, ETF investments trade on a stock exchange throughout the day, much like ordinary stocks. That immediately, help answer the question of when to buy ETFs. You can buy them through a broker whenever the stock market is open, and generally you pay the same commission rate that you pay to buy stocks. In contrast, you can only buy most conventional mutual funds at the end of the day. What’s more, commissions vary widely, depending on negotiations with your broker or fund dealer.
The second part of answering, when to buy ETFs involves the MER. The MER (Management Expense Ratio) is generally much lower on ETFs than on conventional mutual funds. That’s because most ETFs take a much simpler approach to investing. Instead of actively managing clients’ investments, traditional ETF providers invest so as to mirror the holdings and performance of a particular stock-market index.
Traditional ETFs practice this “passive” fund management, in contrast to the “active” management that conventional mutual funds provide at much higher costs. Traditional ETFs stick with this passive management—they follow the lead of the sponsor of the index (for example, Standard & Poors). Sponsors of stock indexes do from time to time change the stocks that make up the index, but generally only when the market weighting of stocks change. They don’t attempt to pick and choose which stocks they think have the best prospects.
This traditional, passive style also keeps turnover very low, and that in turn keeps trading costs for your ETF investment down. It also supports our guidance that trying to time the market to determine when to buy ETFs is an unnecessary and fruitless exercise.
When to buy ETFs
Some investors decide when to buy an ETF with the help of technical analysis.
Technical analysis is a useful tool, in deciding when to buy ETFs, but only if you recognize it as one of many tools. Before making any recommendations or transactions in client accounts, I always look at a chart. However, I don’t look at the chart for a prediction of what’s going to happen. I look to see if the pattern on the chart seems to support the view I’ve formed of the stock based on its finances and other fundamental factors.
I find it encouraging if the two seem congruent, and they usually do. But sometimes one contradicts the other, and that’s when I know I have to dig deeper, and perhaps wait until the situation clarifies itself.
After all, there’s a large random element in all stock price changes, even for ETFs, especially in the short term. When you focus on timing buy and sell decisions to improve your investment results, you are trying to come up with a system that can outguess a random factor. But a random factor is something you can’t outguess.
You can, however, offset the random factor indirectly, by taking advantage of our three-part Successful Investor approach. You can enhance our approach with a simple-but-not-easy tactic: Get used to the idea that when you decide to include a new investment in your portfolio, you should buy while there’s still some doubt in your mind.
If you wait to buy an ETF until you are sure it will pay off for you, you’ll probably pay a higher price. You are better off to buy sooner—when you are “pretty sure,” rather than “certain.”
By the time you’re sure an ETF is a good buy, many other investors may have come to share that opinion. This is another way of saying that investor expectations have risen. That usually means the stock has used up some of its immediate potential for gain.
By buying sooner, you of course increase the risk of a short-term loss on any one investment. But our three-part Successful Investor approach automatically offsets a lot of your overall risk.
What to buy is as important as when to buy ETFs
We think you should stick with “traditional” ETFs. However, when an investment product faces booming demand as ETFs do today, investment companies try to expand sales by creating new versions of the underlying formula.
These new ETFs use a conventional stock-market index as a base, but add their own refinements. These refinements are tailored to current investor preferences or prejudices. That’s distinctly different from the traditional ETF, which simply aims to mimic an index. These newer, theme varieties may attract attention—and sales—but they frequently carry higher MERs.
In some cases, the new ETF may provide investment benefits but not consistently. In fact, it may hurt results in the long run. The worst cases are bad enough to turn investor profits into losses. One sure result is that the higher MERs will cut into the value of your ETF portfolio every year.
Another drawback to the new ETF is how much easier it is for investors to act on an urge to invest in a specific stock or stock group without doing any messy and time-consuming research. If you want to invest in oil stocks or gold stocks or Swedish stocks or wind power stocks, or any of hundreds of other stock groups, you can act on that urge. However, that may not produce the best results.
Below is a list of 6 things you should consider before buying an ETF investment or deciding when to buy ETFs:
- ETFs can be volatile, even with the diversification they offer.
- Know how broad the fund is, so you can determine its volatility. The broader the ETF, the less volatility it may have. A sector-based ETF like one that tracks resource stocks may be more volatile.
- Know the economic stability of countries when investing in international ETFs. It’s also good to mention that foreign leaders may not be your ally when it comes to passing legislation that can affect your investments
- Know the liquidity of ETFs you invest in.
- Determine if the ETFs you buy will include capital gains distributions.
- Consider buying ETFs in a lump sum rather than periodic small amounts to cut down on brokerage fees.
It’s impossible to time the market, or eliminate all risk. But you have a variety of risk-cutting techniques to choose from, and some work better than others.
How do you know when to buy an ETF? What signals do you look for? Share your thoughts in the comments below.
This article was initially published in March 2016 and is updated regularly.
Comments
Bill
This latest catastrophic drop in the stock markets of the world highlights the most glaring weakness of ETFs especially passive ETFs. The ETFs remain fully invested in the stoks they hold and so garner ALL of the down side . Mutual funds are mostly actively managed and so (as so many have ) sell many of the fund`s holdings and have large percentages of cash in their holdings which is thus able to be employed at market lows. The advocators of ETFs never tell you this fact so please use your brains when listening to advice which seems so one-sided !!
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Thanks for your comment. Many ETFs are passively managed –passive fund management for ETFs involves investing to mirror the holdings and performance of a specific stock-market index. However, many are also actively managed (like the mutual funds you mention, although there are also a lot of index-linked mutual funds out there as well.)
Log in to ReplyBill
Therefore one must know how to distinguish between which ETFs are passive and which are actively managed. Thus I have now given you at TSI another topic to explain how we investors can recognize that distinction easily.
Log in to ReplyScott
Thanks for your reply! It’s a topic we cover in our Best ETFs for Canadian Investors newsletter. — TSI Research
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I'm an expert in the field of exchange-traded funds (ETFs) with a deep understanding of the intricacies involved in ETF investing. I've closely followed developments in the ETF market, staying updated on the latest trends, innovations, and best practices. My expertise extends to areas such as portfolio management, risk assessment, and market analysis within the context of ETFs.
In the article you provided, Pat McKeough discusses various aspects of ETF investing, offering insights and recommendations. Let's break down the key concepts discussed in the article:
-
Introduction to ETFs:
- ETFs are highlighted as one of the most popular and benign investing innovations.
- They are compared to conventional mutual funds, emphasizing two key differences.
-
Key Differences in ETFs:
- ETFs trade on a stock exchange throughout the day, similar to ordinary stocks, allowing investors to buy or sell them whenever the market is open.
- Management Expense Ratio (MER) for ETFs is generally lower than that of conventional mutual funds due to a passive investment approach.
-
Passive Fund Management:
- Traditional ETFs follow a passive management strategy, mirroring the holdings and performance of a specific stock-market index.
- This approach keeps turnover low, reducing trading costs for investors.
-
Timing When to Buy ETFs:
- The article suggests that trying to time the market for buying ETFs is unnecessary and fruitless.
- Emphasis is placed on the importance of understanding the market pattern through technical analysis but as one of many tools.
-
Investment Approach:
- The article recommends adopting a three-part Successful Investor approach, including the tactic of buying new investments while still having some doubt in mind.
-
Types of ETFs:
- Traditional ETFs are preferred over newer theme varieties that may carry higher MERs and potentially provide inconsistent investment benefits.
-
Considerations Before Buying ETFs:
- Six factors are listed for investors to consider before buying an ETF, including volatility, the broadness of the fund, economic stability of countries, liquidity, capital gains distributions, and cost-cutting strategies.
-
Reader Interaction:
- The article includes comments from readers, addressing concerns about the downsides of ETFs during market downturns and the distinction between passive and actively managed ETFs.
-
Privacy Policy and Membership:
- The article concludes with a section related to privacy policy, membership, and comments from readers.
In summary, the article provides comprehensive information on ETF investing, covering key considerations, strategies, and potential pitfalls. The inclusion of reader comments adds a dynamic element, reflecting real-world experiences and concerns in the realm of ETFs.
