Is it good to hold ETF for long term?
Higher costs and higher risks can come with overtrading. Holding a long-term ETF can lower costs over time.
ETFs can be a great investment for long-term investors and those with shorter-term time horizons. They can be especially valuable to beginning investors. That's because they won't require the time, effort, and experience needed to research individual stocks.
Holding an ETF for longer than a year may get you a more favorable capital gains tax rate when you sell your investment.
ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses. Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than their NAV, and are not individually redeemed from the fund.
Experts agree that for most personal investors, a portfolio comprising 5 to 10 ETFs is perfect in terms of diversification. But the number of ETFs is not what you should be looking at.
Stock-picking offers an advantage over exchange-traded funds (ETFs) when there is a wide dispersion of returns from the mean. Exchange-traded funds (ETFs) offer advantages over stocks when the return from stocks in the sector has a narrow dispersion around the mean.
Growth ETFs may have higher long-term returns but come with more risk. Value ETFs are more conservative; they may perform better in volatile markets but can come with less potential for growth.
Q: How does the wash sale rule work? If you sell a security at a loss and buy the same or a substantially identical security within 30 calendar days before or after the sale, you won't be able to take a loss for that security on your current-year tax return.
For most standard, unleveraged ETFs that track an index, the maximum you can theoretically lose is the amount you invested, driving your investment value to zero. However, it's rare for broad-market ETFs to go to zero unless the entire market or sector it tracks collapses entirely.
Visit your My NerdWallet Settings page to see all the writers you're following. RDIV and SPYD have some of the highest yields of any high-dividend ETF. It's possible to live off the income from high-dividend ETFs, but it may take some planning.
Why is an ETF not a good investment?
There are many ways an ETF can stray from its intended index. That tracking error can be a cost to investors. Indexes do not hold cash but ETFs do, so a certain amount of tracking error in an ETF is expected. Fund managers generally hold some cash in a fund to pay administrative expenses and management fees.
"Leveraged and inverse funds generally aren't meant to be held for longer than a day, and some types of leveraged and inverse ETFs tend to lose the majority of their value over time," Emily says.
The biggest hassle of an ETF closure is it upends your investment timeline, and there's nothing you can do about it. You're forced to sell or take liquidation proceeds, which can create a tax burden or lock in investment losses.
If you don't want to put a lot of effort into managing your investments, then S&P 500 ETFs are a good solution. But if you're willing to do the work, then you might do even better in the long run with a portfolio of hand-picked stocks (although, the odds are against you).
You expose your portfolio to much higher risk with sector ETFs, so you should use them sparingly, but investing 5% to 10% of your total portfolio assets may be appropriate. If you want to be highly conservative, don't use these at all.
One way to think about it is every three months taking whatever excess income you can afford to invest – money that you will never need to touch again – and buy ETFs! Buy ETFs when the market is up. Buy ETFs when the market is down.
| ETF | Assets | Expense ratio |
|---|---|---|
| Invesco QQQ Trust (QQQ) | $249 billion | 0.20% |
| Vanguard High Dividend Yield Index ETF (VYM) | $51 billion | 0.06% |
| Vanguard Total International Stock ETF (VXUS) | $63 billion | 0.07% |
| Vanguard Total World Stock ETF (VT) | $33 billion | 0.07% |
ETFs can be safe investments if used correctly, offering diversification and flexibility. Indexed ETFs, tracking specific indexes like the S&P 500, are generally safe and tend to gain value over time. Leveraged ETFs can be used to amplify returns, but they can be riskier due to increased volatility.
ETFs can be used within a portfolio to make short-term tactical adjustments to the asset mix to over- or under-weight certain styles, regions or industries, without having to invest in individual securities. This allows investors to respond to overall macro ideas while avoiding security-specific risks.
ETFs are less risky than individual stocks because they are diversified funds. Their investors also benefit from very low fees.
Are ETFs the future of investing?
That's a new all-time high for active ETFs that signifies favorable growth potential in the future. In net asset terms, active ETFs have grown from $112 billion in 2019 to $509 billion in 2023—a 35% five-year compound annual growth rate. ETFs have experienced strong and steady inflows over the decade.
These ETFs can hold income-generating assets, such as dividend stocks, preferred shares, corporate bonds, real estate investment trusts (REITs) and master limited partnerships (MLPs). They offer the advantage of monthly yields, which may be further enhanced by the use of options such as covered calls.
Holding an inverse ETF for more than a day can produce returns that don't track with the total return of the underlying security. The more volatile the underlying security, the greater the tracking error.
If you own shares of an exchange-traded fund (ETF), you may receive distributions in the form of dividends. These may be paid monthly or at some other interval, depending on the ETF.
Through everyday redemptions and heartbeat trades, equity ETFs are able to make tax-free portfolio adjustments and avoid generating capital gains until their shareholders sell their shares.
