Why ETFs Are So Popular
Exchange traded funds (ETFs) are extremely popular with investors because they offer advantages over both stocks and mutual funds. They trade on major exchanges like other heavily traded stocks do. At the same time, they offer diversification like mutual funds do.
More and more, investors who want to play the stock market buy and sell ETFs. If you have an account with a major discount broker, a trade can cost $10 or less. Mutual fund investors can invest in stocks, bonds or commodities by simply buying and selling the appropriate ETF.
Stock speculators like them because some ETFs offer leverage of 2x or 3x. Plus, with an ETF you can bet that stock prices will fall or rise. Smart investors like them because they are a simple and efficient way to hedge losses in other investments.
I've played the stock market and stock options since 1973. I now invest mostly in ETFs. I use them for both speculation, and to offset possible losses in my wife's 401k and IRA. Let me give you an example of how this works.
Early in 2008 I was getting a bit uncomfortable with stock prices. Allison had some of her retirement plan assets in stocks, and I wanted to be able to offset possible losses quickly and easily with maximum flexibility. Retirement plans like hers are not designed as trading platforms. In other words, you can not buy and sell your funds (mutual funds) whenever or as often as you want in real time.
So, I bought an ETF with the stock symbol (SDS) in my brokerage account. As the market got even weaker in September, I bought some more. Here's how it works.
SDS tracks the stock market in general, specifically the S&P 500 Index. When the market as measured by this major index FALLS by 1%, SDS goes UP by about 2%. Hence, as Allison's stock mutual funds lost value in her retirement plan, I was making money to offset the losses in my brokerage account.
I actually made numerous trades in ETFs over the following months, but overall I was "short" the stock market in my brokerage account. In other words, I was betting that stocks would fall. As it turned out, I made money in my account, and Allison had a small loss in her 401k for the year 2008.
ETFs simplify things for investors. You can bet that the stock market in general will go up or down, or bet on a segment of the market (like real estate stocks or financial stocks). All of this can be done with a click of a mouse for about $10 a trade.
More and more, investors who want to play the stock market buy and sell ETFs. If you have an account with a major discount broker, a trade can cost $10 or less. Mutual fund investors can invest in stocks, bonds or commodities by simply buying and selling the appropriate ETF.
Stock speculators like them because some ETFs offer leverage of 2x or 3x. Plus, with an ETF you can bet that stock prices will fall or rise. Smart investors like them because they are a simple and efficient way to hedge losses in other investments.
I've played the stock market and stock options since 1973. I now invest mostly in ETFs. I use them for both speculation, and to offset possible losses in my wife's 401k and IRA. Let me give you an example of how this works.
Early in 2008 I was getting a bit uncomfortable with stock prices. Allison had some of her retirement plan assets in stocks, and I wanted to be able to offset possible losses quickly and easily with maximum flexibility. Retirement plans like hers are not designed as trading platforms. In other words, you can not buy and sell your funds (mutual funds) whenever or as often as you want in real time.
So, I bought an ETF with the stock symbol (SDS) in my brokerage account. As the market got even weaker in September, I bought some more. Here's how it works.
SDS tracks the stock market in general, specifically the S&P 500 Index. When the market as measured by this major index FALLS by 1%, SDS goes UP by about 2%. Hence, as Allison's stock mutual funds lost value in her retirement plan, I was making money to offset the losses in my brokerage account.
I actually made numerous trades in ETFs over the following months, but overall I was "short" the stock market in my brokerage account. In other words, I was betting that stocks would fall. As it turned out, I made money in my account, and Allison had a small loss in her 401k for the year 2008.
ETFs simplify things for investors. You can bet that the stock market in general will go up or down, or bet on a segment of the market (like real estate stocks or financial stocks). All of this can be done with a click of a mouse for about $10 a trade.
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