What is Risk? This is intuitively obvious. The entrepreneur invests in a new business knowing that there is a probability of failure. The Venture Capitalist invests in a portfolio of businesses knowing that some may give him 30X returns and others may fail. But lets review this in the context of Equity investments.

Asset Classes In investing, this risk-return rule is true across asset classes. The following graphic Fig 1 illustrates the Risk and Return rankings across different asset classes. Fig 1. FDs come next, as they are of fixed duration and fixed returns, guaranteed by a Bank. Next come Debt, Bonds, and Endowment Life insurance. Insurance of course is a very high gestation investment product.

Gold and Gold ETFs are another investment option. Real estate may come next. Direct equity is the highest risk investment product. It also provides potentially the highest returns of these asset classes. The graphic Fig 1 is only a conceptual map, and indicates relative values. Risk in Equity Direct Equity as an asset class has two types of Risk: Systemic risk is applicable across all sectors. A significant political event, for example, could affect your entire equity portfolio.

It is virtually impossible to protect yourself against this type of risk. This kind of risk affects a few of the assets. An example is news of a sudden strike by employees, that can only affect a specific stock. Diversification is the only way to protect yourself from unsystematic risk. Even equity can be split into equity classes, where the risk profiles are different, see Fig 2.

If, on any particular Monday the market is closed, you should make your trades between AM and PM on Tuesday. If things have calmed down by the afternoon on Monday, or perhaps the following day Tuesday , your trades can be filled then. Volatile market conditions present potentially pernicious conditions for making ETF trades — whether you are buying or selling.

Whether the source of the volatility is fear-based panic from bad news or greedy overenthusiasm from good news, wide price swings can cause you to get position pricing unhinged from reality — and you should avoid those times if possible. As an example, imagine buying or selling ETFs in September — when stocks were experiencing a waterfall selloff associated with the Financial Crisis. However, by noon of that day, they were back to their accurate price and market conditions were calm.

Generally speaking, you'll find that a policy that avoids trading during high market volatility will serve you well throughout all aspects of your investing activities, and not just ETF-investing. New subscribers frequently ask whether they should buy all the ETFs listed in their model s , or to wait until their model recommends new ETFs. Going forward, it is challenging to predict when your Premium Strategy will buy a new ETF or ETFs , since each model has a different average hold time, and sometimes a model will hold a position much longer than the average if the market is in a steady upward climb and the ETFs held have not gotten overextended.

Therefore, when getting started, we recommend that new subscribers should probably buy each of the ETFs listed in the Current Holdings table. We believe it's best to jump in and get started by putting your money to work immediately. This is the information you will need to enter your first purchases on your broker's website.

Keep in mind that whenever you place your trades, the ETF's price will invariably move slightly higher or lower between the time you enter the trade on our broker's website — and when the ETFs are are actually sold or purchased on the trading floor in New York. Some ETFs will be electronically purchased or sold in the cloud, and your shares may never be observed by a human after the trade leaves your desk.

Such is the zeitgeist of our modern, digital world! Even though your order moved through the system at the speed of light even if you live on the opposite side of the world from the exchange , it still requires anywhere from a fraction of a second to a couple of seconds for your order to be routed appropriately and executed electronically.

During this miniscule amount of time, prices can and likely will move a tiny amount, so you will never be able to make your position weights match the position weights shown in our models. Therefore, try to get your ETF weights to match your model's target weights, but realize that it will be impossible to match them precisely.

By 'rebalance,' we mean selling shares of the overweight ETFs and buying shares of the underweight ETFs in your portfolio to get them closer to the target weight. These percentages provide the amount of each ETF you should own at midday on Monday Tuesday if Monday is a holiday , after your trades are executed. Sometimes we will have two or more Strategies recommending the same ETF, so it will have a higher weight than you might expect.

This rebalance is done automatically by each systematic strategy, and we will not mention it in the 'Most Recent Changes' table. In the 3-ETF example below, we have one ETF that has moved sharply higher over the last week, and while the other two ETFs may have not have lost money, their relative weight still has declined by about So you might see the weights change to this example scenario before you need to rebalance your portfolio: ETF If you see a situation like this occur with your positions, you should rebalance each position by selling 3.

We are working on a Trade Widget that will calculate the number of shares you need to own of each ETF. This widget will be installed and available for your use on each Premium Strategy page. We will notify users when these installations are complete. In the meantime, you will need to pull out your handy calculator and calculate the shares each time a trade is recommended.

Checking your account multiple times every day or even worse - having a colorful trading platform with your holdings open all day long is one of the most ubiquitous mistakes made by inexperienced investors. This tendancy to worry over losing money even haunts very experienced, emotionally detached investors from time-to-time. The first rule of Rules-Based Investing is to not break the rules! Investors usually have a longer-term timeframe of months or even years for investments to attain their full value, while Traders typically have a shorter-term timeframe of days or a couple of weeks.

Investors understand that it can require time for a particular investment thesis to play out. For example, if your model identifies that stock prices have rallied too-far, too-fast, it may switch to defensive ETFs. However, in the short-term, stocks may continue moving higher as the emotion of greed continues to dominate the markets.

When this happens, and your portfolio is positioned defensively, you may see short-term losses for a few days or sometimes a week or two. For short-term traders, these single-day losses can cause great anxiety — while long-term investors, who are confident in their quantitative strategy's choices and shrug it off as being the last vestiges of a temporarily irrational market.

The Trader, after watching the market continue higher for days while his Premium Strategy's positions are losing a bit of money each day, is prone to pulling the plug on those defensive positions, canceling his ETFOptimize subscription, and buying long positions. The trader capitulates to a classic case of 'fear of missing out' — just in time to see the market reverse downward and his latest investments plummet in value.

You need to divorce your mind from the crowd. The herd mentality causes your brain to become paralyzed. To be a successful investor you must divorce yourself from the fears and greed of the people around you, although it is almost impossible. Instead, they quickly made up the previous set-back and began profiting. The ETFOptimize models can certainly have days, weeks, and even months that when they will experience relatively small losses, but on a yearly basis, they have a perfect track record.

The ETFOptimize Premium Strategies have a long-term perspective and are based on dozens of logical, well-proven leading indicators. However, in the short-term, the stock market can be illogical — even pathologically irrational — but in the long-term, it reverts to common-sense economic relationships. Each strategy shows its worst-case drawdown since inception in the Results Summary table on each Premium Strategy Page.

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Understanding your timeline is a key part of determining your financial goals for exchange traded fund investing. When will you need to start taking money out of your portfolio? If you need money sooner, for goals like a home down payment , consider less risky ETF options. Almost all ETFs are index funds. When selecting an ETF, pay attention to which index it models itself on. Even within the same category, indexes may contain drastically different companies and securities. Constituent investments.

If you only want your investing dollars to go to companies with business practices and causes you support, broad indexes may make investing difficult. These approaches help you invest in sectors and businesses with positive social and environmental impacts. Expense Ratio. An expense ratio is what you pay to cover the costs associated with running the ETFs you invest in. While ETFs overall have lower expense ratios than most mutual funds , even seemingly similar ETFs can have widely differing expense ratios.

These seemingly small annual fees can dramatically reduce your investment returns, so aim to pick ETFs that match the index you want with the lowest expense ratios. Active or Passive Management. The vast majority of ETFs are passively managed, meaning that they aim to track an underlying benchmark index and duplicate its returns. Active ETFs , on the other hand, are actively managed by professionals that personally select the securities within the fund and may attempt to outperform a certain benchmark index.

At the very least, actively managed ETFs aim to provide returns regardless of market conditions. To do this, though, they often charge much higher expense ratios than passively managed funds. This is despite the fact that historically index funds have outperformed actively managed funds, meaning you may end up paying more for worse performance.

You have many options to choose from, depending on your goals: IRAs. I ndividual retirement accounts are tax-advantaged accounts that allow you to buy and sell investments without paying capital gains taxes.

Taxable investment accounts. This makes them a good choice for financial goals other than retirement. These tax-advantaged accounts are used to invest money to be used for educational expenses. Custodial accounts. When the child you opened the account for reaches a given age, usually between 18 and 25, depending on your state, they become the owner of the account and can use the ETFs for any purpose.

Before then, funds can be used in any way that benefits the child account owner. This grants custodial accounts more versatility than plans, which can only be used for educational purposes. These automated investing platforms build portfolios of ETFs for you based on your financial goals and your ability to take on risk.

Robo-advisors charge fees to manage your investments. This means that while they offer convenience, it may cost you more to invest in the same ETFs than it would on your own. Most major brokerages offer these accounts for ETF investing. Each broker has its own account registration process and requirements.

Make a Plan to Keep Investing in ETFs Making steady, gradual contributions to your investment portfolio is a great strategy for most investors. Exchange traded funds are well suited to this style of investing as there are no minimum purchase amounts, like with mutual funds. In addition, a growing number of online brokers allow you to buy fractional shares of ETFs. By making investments at regular intervals—weekly, monthly or quarterly—rather than in one lump sum, you help minimize your chances of accidentally investing all of your money when market prices are high.

Instead, by investing the same dollar amount over time, you buy a few shares when prices are high, and more shares when prices are low. From then on, assets under management started to grow heavily. ETF products cover nearly every sector in the economy. Whether it be energy, industrials, health care, financials, real estate, information technology or consumer staples, for each of these sectors one or more ETFs exist.

There are also some more exotic ETFs around, tracking industries like esports, cryptocurrencies or cannabis. An exchange traded fund ETF is a fund that tracks a benchmark index. This can either be a stock index, a bond index, a currency index, a real estate index, a commodity index or something else. For the most part, ETFs function like index funds. Like these, ETFs offer investors a convenient way of investing in a diversified set of titles whatever the index tracks with one single transaction.

While an index fund can be bought or sold once a day, an ETF can be continuously traded throughout the trading day. ETFs are issued as shares in a process of creation and redemption. This process can only be executed by so-called authorized participants. As such, an ETF can never really be more liquid than its underlying market. ETF Basics Passive versus active: Because ETFs are tracking an underlying index, they are usually referred to as passive investment products as there is no investment team that actively manages the composition of the ETF but adheres to a passive investment strategy.

As a matter of fact though, there also exist actively managed ETFs. While such an ETF also follows a benchmark index, its managers can decide to deviate from the index by changing the sector allocation for example. Consequently, such an actively managed ETF can either out- or underperform its index. Additionally, there is also an ETF type called smart beta ETFs, which use a combination of both passive and active elements of investing.

Dividends: With equity ETFs, dividends accrue. Holders of such ETFs profit from this as well , either in the form of direct dividend distributions or through the reinvestment of the dividends into the ETF itself. This means that the ETF reinvests dividends into the shares that correspond to the assets of the underlying index.

If an investor intends to reinvest the dividends anyways, holding an ETF that reinvests them automatically makes sense because this way, additional costs can be prevented. In the total expense ratio management, trading, operating as well as legal fees are included.

As an investor one should keep in mind though that not all costs are included in the TER. Commissions, broker fees and taxes are not taken into account. This means that the former are usually more expensive than the latter. Also, mutual funds are like index funds as they are bought and sold just once per trading day.

ETFs on the other hand can be traded on an exchange throughout the day similar to stocks. This also makes them into more liquid investments. Additionally, ETFs can be more tax-efficient than mutual funds. ETFs tend to realize fewer capital gains than actively managed mutual funds, which is why taxes can be optimized with the former.

Apart from these differences, mutual funds and ETF are pretty similar investment products. ETFs are traded throughout the day on exchanges. This makes them more liquid than their counterparts, the mutual funds.

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