Can you beat the market with ETFs?
We often hear investors talk about how hard it is to "beat the market" over time, and when it comes to ETFs, for the most part, they are right. ETFs that beat the broader market indices like the S&P 500 over the long run are rare.
ETFs are most often linked to a benchmarking index, meaning that they are often not designed to outperform that index. Investors looking for this type of outperformance (which also, of course, carries added risks) should perhaps look to other opportunities.
MarketWatch spotlights VanEck Morningstar Wide Moat ETF (MOAT), consistently outperforming the S&P 500 by targeting companies with long-term competitive advantages or "economic moats."
A $1000 investment made in November 2013 would be worth $5,574.88, or a gain of 457.49%, as of November 16, 2023, according to our calculations. This return excludes dividends but includes price appreciation. Compare this to the S&P 500's rally of 150.41% and gold's return of 46.17% over the same time frame.
With enough time and consistency, you can earn well over $1 million with ETFs while still limiting your risk. Data source: Author's calculations via Investor.gov.
At any given time, the spread on an ETF may be high, and the market price of shares may not correspond to the intraday value of the underlying securities. Those are not good times to transact business. Make sure you know what an ETF's current intraday value is as well as the market price of the shares before you buy.
ETFs are less risky than individual stocks because they are diversified funds. Their investors also benefit from very low fees.
Investors face substantial risks with all leveraged investment vehicles. However, 3x exchange-traded funds (ETFs) are especially risky because they utilize more leverage in an attempt to achieve higher returns.
The figures tell a remarkable story. Over the full period, just 2% of actively managed Large-Cap Core funds beat the S&P 500.
If you invested in the company 10 years ago, that decision could have paid off. According to CNBC calculations, a $1,000 investment in Coca-Cola in 2009 would be worth more than $2,800 as of Feb. 15, 2019.
How much would $10000 invested in the S&P 500 in 1980 be worth today?
It tracked a hypothetical $10,000 investment in the S&P 500 stock index made on Jan 1, 1980 through the end of 2022. If the money was left untouched, the $10,000 invested in 1980 was worth $1.26 million at the end of 2022.
If you're aiming for a colossal financial status, say, hundreds of millions or even billions, or if you fancy being on the rich lists, then the likelihood of reaching such heights solely through ETFs or share market investments is quite low.
“When you're ultra wealthy you do have access to some unique investment opportunities, but the vast majority of ultra wealthy people's portfolios consist of index funds, ETFs, and mutual funds, and maybe some sector funds,” she says.
ETF fees are accrued daily, which means they are reflected in the daily price of an ETF; however, the fees are typically deducted from fund assets on a monthly basis. From the investor's perspective, ETF fees are not directly paid like a monthly bill. Instead, they are reflected in a fund's net return.
Often, the ETF will realize capital gains during the liquidation process, which it will pay out to the shareholders of record and that could mean an unnecessary tax burden. There will also be transaction costs, uneven tracking, and various other grievances.
Interest rate changes are the primary culprit when bond exchange-traded funds (ETFs) lose value. As interest rates rise, the prices of existing bonds fall, which impacts the value of the ETFs holding these assets.
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.
In fact, 47% of all such funds have closed down, compared with a closure rate of 28% for nonleveraged, noninverse ETFs. "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.
ETFs may close due to lack of investor interest or poor returns. For investors, the easiest way to exit an ETF investment is to sell it on the open market. Liquidation of ETFs is strictly regulated; when an ETF closes, any remaining shareholders will receive a payout based on what they had invested in the ETF.
The securities that underlie the funds are held by a custodian, not by Vanguard. Vanguard is paid by the funds to provide administration and other services. If Vanguard ever did go bankrupt, the funds would not be affected and would simply hire another firm to provide these services.
Is it OK to hold ETF long-term?
Nearly all leveraged ETFs come with a prominent warning in their prospectus: they are not designed for long-term holding. The combination of leverage, market volatility, and an unfavorable sequence of returns can lead to disastrous outcomes.
Generally speaking, fewer than 10 ETFs are likely enough to diversify your portfolio, but this will vary depending on your financial goals, ranging from retirement savings to income generation.
Holding a long-term ETF can lower costs over time. Feb. 16, 2024, at 3:25 p.m. Discipline and patience is the name of the long-term game. Once again, the last year reinforced that buy-and-hold investing is boring but incredibly effective.
The largest Aggressive ETF is the iShares Core Aggressive Allocation ETF AOA with $1.82B in assets. In the last trailing year, the best-performing Aggressive ETF was AOA at 18.26%. The most recent ETF launched in the Aggressive space was the iShares ESG Aware Aggressive Allocation ETF EAOA on 06/12/20.
Think About This: $10,000 invested in the S&P 500 at the beginning of 2000 would have grown to $32,527 over 20 years — an average return of 6.07% per year.
