ETFs, or Exchange Traded Funds, are all the rage in the investment world, but so far, they really don’t have much of a track record. This is a fairly new method for investing and the long term data just isn’t there to determine how effective these investments can be over time.
There is a lot of controversy over whether or not ETFs are sound, but many of them do produce impressive gains over the short term. So, are these investments a good way to create a secondary stream of income? Let’s take a look at the benefits and downsides of this form of investment.
Risk –
This will depend largely on the type of ETF you select. For example, those that sunk their money into housing or mortgage funds are truly regretting that decision now and facing catastrophic losses. Those that stuck with a more diversified fund, like the SPDR Trust, or the Vanguard Total Stock Market Vipers are in a better position.
The key is picking the right kind of ETF. Right now, until there is more data available on these funds, it is best to stick with the ones that are well known and diversified. These funds do have a short term track record of performing well, and there is much less risk than with a “designer” ETF.
Short Term Gains –
ETFs can do very well in the short term, with some returns in excess of 30% over six months. However, look at the long picture, and that may drop to -30% for twelve months. The bottom line is that this is not a reliable long term investment. There is just too much room for risk and losses can be high when you look at the data for many of these funds.
Some people have found that getting in and out with an ETF is the best strategy, but ultimately, that decision is up to you and your broker. Many of the benefits of an ETF are outweighed by the inherent risks and the overall lack of good performance data.
So, what does that spell for those looking to create multiple streams of income? Right now, unless you are willing to ride out the markets, the answer is probably now. So far, the data indicates that ETFs are solid performers short term, and not so reliable over the long term. Whether you want to take that risk of sinking your money in and hoping for long term gains is completely up to you. However, there are many other long-term performers out there that are much more suited towards building a reliable secondary stream of income.
Diversity is always good however, and if you have some extra money that you are not relying on, you may want to discuss ETFs with your broker. One thing is certain, these funds will be interesting to watch, especially over the next two years as the housing market and the state of the economy continue to affect them.
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Originally posted 2008-09-17 05:04:09. Republished by Blog Post Promoter
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