How long should you hold an ETF?
Holding an ETF for longer than a year may get you a more favorable capital gains tax rate when you sell your investment.
For most ETFs, selling after less than a year is taxed as a short-term capital gain. ETFs held for longer than a year are taxed as long-term gains. If you sell an ETF, and buy the same (or a substantially similar) ETF after less than 30 days, you may be subject to the wash sale rule.
Hold ETFs throughout your working life. Hold ETFs as long as you can, give compound interest time to work for you. Sell ETFs to fund your retirement. Don't sell ETFs during a market crash.
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.
The average stock-based ETF is held for about two years
According to S&P Global Market Intelligence, advisers and retail investors who use ETFs are keeping their positions for a meaningful amounts of time, with the average holding period more than two years for the most popular fund categories.
If you buy substantially identical security within 30 days before or after a sale at a loss, you are subject to the wash sale rule. This prevents you from claiming the loss at this time.
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.
Over the past decade, you would have done even better, as the S&P 500 posted an average annual return of a whopping 12.68%. Here's how much your account balance would be now if you were invested over the past 10 years: $1,000 would grow to $3,300. $5,000 would grow to $16,498.
Lower dividend yield
Some ETFs pay dividends, but investors may receive higher returns on specific securities, such as stocks with large dividends. That's partly because ETFs track a broader market and therefore have lower yields on average.
In 1980, had you invested a mere $1,000 in what went on to become the top-performing stock of S&P 500, then you would be sitting on a cool $1.2 million today.
What ETF has the best 10 year return?
| Ticker | Fund | 10-Yr Return |
|---|---|---|
| SMH | VanEck Semiconductor ETF | 24.37% |
| SOXX | iShares Semiconductor ETF | 23.62% |
| PSI | Invesco Dynamic Semiconductors ETF | 23.59% |
| XSD | SPDR S&P Semiconductor ETF | 21.88% |
The choice comes down to what you value most. If you prefer the flexibility of trading intraday and favor lower expense ratios in most instances, go with ETFs. If you worry about the impact of commissions and spreads, go with mutual funds.
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.
A lack of trading activity means the sale is made below the value it would have in a volatile market. Investors can choose to hold their ETFs for a return in action. Nonetheless, a decline in liquidity can mean a drop in value for both the short and long term, which makes investors more likely to sell.
At least once a year, funds must pass on any net gains they've realized. As a fund shareholder, you could be on the hook for taxes on gains even if you haven't sold any of your shares.
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.
Specifically, a fund is prohibited from: acquiring more than 3% of a registered investment company's shares (the “3% Limit”); investing more than 5% of its assets in a single registered investment company (the “5% Limit”); or. investing more than 10% of its assets in registered investment companies (the “10% Limit”).
Holding too many ETFs in your portfolio introduces inefficiencies that in the long term will have a detrimental impact on the risk/reward profile of your portfolio. For most personal investors, an optimal number of ETFs to hold would be 5 to 10 across asset classes, geographies, and other characteristics.
Under the Investment Company Act, private investment funds (e.g. hedge funds) are generally prohibited from acquiring more than 3% of an ETF's shares (the 3% Limit).
Disadvantages of investing in ETFs
Not all ETFs are the same, so investors do have to understand what they own and what it could return. Like stocks, the investment performance of ETFs isn't guaranteed by the government and you could lose money on the investment.
Why are 3x ETFs wealth destroyers?
Since they maintain a fixed level of leverage, 3x ETFs eventually face complete collapse if the underlying index declines more than 33% on a single day. Even if none of these potential disasters occur, 3x ETFs have high fees that add up to significant losses in the long run.
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.
| Discount Rate | Present Value | Future Value |
|---|---|---|
| 6% | $1,000 | $3,207.14 |
| 7% | $1,000 | $3,869.68 |
| 8% | $1,000 | $4,660.96 |
| 9% | $1,000 | $5,604.41 |
Meaning my $10,000 investment would now be worth $15,900. Now, if I'd bought into the pioneering EV producer five years ago, and held them through the 2022 retrace and the 2023 rebound, I would have seen those Tesla shares gain a stellar 756%. That would see my $10,000 investment balloon into $85,600.
The result is the number of years, approximately, it'll take for your money to double. For example, if an investment scheme promises an 8% annual compounded rate of return, it will take approximately nine years (72 / 8 = 9) to double the invested money.
