Gallery:Step 12|Step 12: Invest and Relax

ETFs for the Buy-and-Hold Investor

Gallery:Step 12|Step 12: Invest and Relax

The following article is an excerpt from the book by Will McClatchy and Jim Wiandt, Exchange Traded Funds - An Insider's Guide to Buying the Market, published by John Wiley & Sons. The book is available for purchase on Amazon.com.

The buy-and-hold investor has as much to gain from ETFs as anyone. While media hoopla has focused on day traders using ETF, in reality ETFs' greatest strengths lie in their long-term features. Especially when purchasing an index-oriented product, over time the keys to success are:

  • Low fees
  • Tax efficiency
  • Broad diversification

The average investor who has little experience with ETFs can quickly grasp their relevance and is a lot more savvy than the so-called experts of Wall Street would have the world believe. In this chapter we will examine typical scenarios for individual, long-term investors. Compounding interest over time magnifies the advantages of low fees and tax efficiency. A dollar saved early on in the life of a portfolio grows exponentially and, especially towards the end of the investment period, can produce substantial results.

For the long-term investor, ETFs cost about as much to own as the least expensive index funds and perhaps a bit less. They appear to have the edge in annual fees, often are tax-advantaged but suffer from some additional transaction costs. Compared to the average actively-managed fund, they are truly a bargain. The one feature that no mutual fund can match is the simplicity, freedom and flexibility of owning an instrument that is bought and sold like a stock. Every investor must consider for themselves the value of this feature. This feature together with transation costs, long term expenses, and tax efficiency are the primary issues that must be addressed by buy and hold investors. Here is how buying individual stocks, mutual funds and ETFs compare:

Pros and Cons of Various Options Open to a Small Investor
Strategy
Front Loads or Broker Fee
Management Fees over 18 Years
Broker Fees and Spreads
Tax Effects
Flexibility
Buy 50 stocks and bonds
High
None
High
Excellent
Very High
Low cost mutual funds
None
Low
Very Low
Good
Low
Low cost ETFs
Low
Very Low
Low
Very Good
High

For the remainder of (Chapter 3), we will discuss different model porfolios for various investors with leading advisors and money managers. The models will cover a variety of investor scenarios with varying economic assumptions, risk tolerances, and investment horizons.

Exchange Traded Funds - An Insider's Guide to Buying the Market, is a book by Will McClatchy and Jim Wiandt of IndexFunds.com. It was published by John Wiley & Sons.