How to create an ETF investment strategy. You'll need it when markets get ‘crazy,’ advisor says Here are two factors to consider
Having an investment strategy is crucial when faced with market volatility, and that applies to exchange-traded funds
Investors have been piling more money into exchange-traded funds. ETF assets topped $10 trillion for the first time in November, according to Cerulli Associates, and as of June, now total $13.74 trillion, Hightower Advisors found.
Just as with other investments, it's smart to have a strategy for ETF purchases, experts say.
'The best thing about the ETF'
Similar to mutual funds, an exchange-traded fund is a basket of securities that closely track a broad index. Part of ETFs' attraction for new investors is lower associated costs and tax advantages, said Gloria Garcia Cisneros, a certified financial planner at LourdMurray, an investment and wealth management firm.
"The best thing about the ETF is that it's not like old school mutual funds," said Garcia Cisneros.
They also offer more flexibility. For instance, ETFs can be bought and sold throughout the day and during extended hours. Mutual funds can only be traded once a day after the market closes.
"ETFs have made it a lot easier," Garcia Cisneros said.
Despite that flexibility, it's important to approach ETF investing with a strategy, or a plan that guides your investments, said Lee Baker, a certified financial planner as well as the founder, owner and president of Claris Financial Advisors in Atlanta.
Having a plan gives you something to stick to when "things inevitably get a little crazy," said Baker, a member of CNBC's Financial Advisor Council.
Here are two things to consider when you're coming up with a plan.
1. Trading in the middle of the day is 'less frothy'
Everyday investors may want to avoid buying close to the U.S. stock market opening and closing hours, or 9:30 a.m. ET and 4 p.m. ET, said Baker. Prices are typically the most volatile during those points of the day.
The hours in the middle of day, or between 10 a.m. ET to 2 p.m. ET, are "less frothy," he said.
However, Garcia Cisneros said that you also want to avoid "timing the market," or making trades based on predictions about price movements.
Not only is it difficult to do, but there isn't much of a payoff.
In a new study by Charles Schwab that compared the performance of five hypothetical long-term investors with different strategies, the "perfect market timer" had just slightly better results than someone who simply invested their cash at the start of every year.
"Because timing the market perfectly is nearly impossible, the best strategy for most of us is to not try to market-time at all," the report noted.
Instead, investors can try "dollar-cost averaging," a strategy that requires investing a certain amount of cash over regular intervals.
2. Limit orders are like 'waiting for a bag to go on sale'
One way to buy ETFs is by placing "limit orders," which give you more control in your investment, experts say.
A limit order is an order to buy or sell a security at a specific price or better, according to the U.S. Securities and Exchange Commission's Investor.gov. A buy limit order can only be executed at the price you set or lower, and vice versa with a sell limit order.
It allows you to say, "I only want to buy this ETF if it drops to $50," and not the current trading price, Garcia Cisneros said.
For example, if you want to buy multiple shares of a particular ETF, a limit order can help protect your exposure in case there's a lot of volatility happening with that fund, Baker said.
However, you're practically relying on a prediction on what the market will do, which can be difficult, said Garcia Cisneros.
"It's like if you're waiting for a bag to go on sale to buy it, you might be waiting forever," she said. "I would hate to see if they wait forever and don't actually put any money to work."
This story originally appeared on: CNBC - Author:Ana Teresa Solá
