4 ETF Investing Strategies For Beginners
ETF Investing Strategies For Beginners
If you are a beginner, you may not have the expertize to pick individual stocks, so it makes sense to try and start with an ETF only portfolio. But before you get going.
Let’s answer the question: what is an ETF? An ETF or Exchange Traded Fund is a
collection of many stocks or bonds that are traded under one fund, very similar to mutual funds. However, unlike mutual funds, ETFs are traded on the U.S. stock exchanges with real time pricing. So you can buy and sell them real time.
Now, let’s look at four ETF strategies that you could look at when you’re getting started.
The first strategy that we will discuss is called dollar cost averaging, which you might know as SIPs. In this, you buy assets worth a fixed amount of dollars regularly, irrespective of the price of the asset.
When you are a beginner., you should try and save a regular amount in an ETF or a group of ETFs. Doesn’t need to be just one. Try and save it regularly, every month or every week, even if it’s a small amount. This helps you build discipline in your saving process so that you don’t time the market. The idea is not to time the market, but to spend time in the market.
The next strategy is asset allocation. What asset allocation means. It’s a fancy term, but what it means is that you should not put all your money in a single asset category. Asset categories are equities, bonds, gold, etc. Instead, you should spread across different asset classes. So you could look at some investments in stocks, bonds, commodities, etc.
ETFs are ideal to achieve your asset allocation goals because they help beginners implement a basic strategy very easily. Your asset allocation should be based on your risk profile. How much risk can you take in terms of investments? So for example, if you are in your twenties equity ETFs or stock ETFs may form a majority of your portfolio, since you have time on your hands. With age and depending on your goals, you may decide to adopt a less aggressive strategy by increasing the proportion of investments in bond ETFs vs say equity ETFs. Yes. All right.
Exposure to sectors
The third strategy that we’re going to look at is that ETFs allow you to get exposure to a sector which would otherwise have been very difficult to invest in. For example, if you want to get exposure to the technology and robotics sector in the US, you can look at the ARK Autonomous Technology & Robotics ETF. Or if you want to invest in the clean energy, you believe that renewable energy is the future then, you can look at an ETF called the ALPS Clean Energy ETF.
ETFs also let you execute a sector rotation strategy, where you can book profits from one ETF and choose to move to another ETF depending on the economic cycles. This is particularly helpful in cyclical industries. Industries that basically have boom and bust cycles.
Alright, the last strategy that we’re going to be looking at is that ETFs allow you to diversify the global markets beyond just investing in the U.S. market. specifically. For example, the Invesco China Technology ETF tracks the prices of the FTSE China Technology Index and gives you exposure to companies like Tencent or Baidu. These are huge technology companies that are built out of China.
Another ETF, is the iShares MSCI Japan ETF which tracks an index comprising Japanese stocks and some of its holdings include the likes of Toyota or Sony. So combining the U.S. and international ETFs, it helps you create a truly global portfolio. Alright, so today we looked at four ETF investing strategies for you to get started in the US markets.
So that’s it for now. Stay tuned for more.