ETF Dollar Cost Averaging
Dollar cost averaging (DCA) or systematic investment plan is one of the most popular investing strategies followed by many investors, especially small-scale investors who frequently invest small amounts. Know more about dollar cost averaging. Exchange traded funds (ETFs) are also good instruments to DCA but there are two factors to be concerned, expense ratio and trading costs.
Low expense ratios make ETFs suitable for dollar cost averaging; even the low-cost mutual funds (which are considered ideal for DCA) have high expense ratios than most ETFs. The expense ratio is a fixed-rate percentage. For example if the expense ratio of an ETF is 10 basic points, the expense ratio cost will be $0.1 for $100 investment and $1 for $1000 investment. Also ETFs do not have any sales charges, low-balance fee or purchase fees, which some mutual funds include.
As ETFs are traded just like stocks, they include trading brokerage fees, which can be of per trade or per share basis. For keeping the effect of trading costs minimum, the investor should trade ETFs in larger amounts less frequently preferably through a discount broker offering low charges. For example, if the flat fee of trading is $10 per trade, investing $100 in ETF monthly will result in 10% disappearance of money ($100 - $10) and after a year the portfolio value should be $1080 (90%); if the value of ETF stays same. But if the investment is done tri-monthly basis ($300 per trade) then the portfolio value after a year should be $1160 ($290 x 4).
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Low expense ratios make ETFs suitable for dollar cost averaging; even the low-cost mutual funds (which are considered ideal for DCA) have high expense ratios than most ETFs. The expense ratio is a fixed-rate percentage. For example if the expense ratio of an ETF is 10 basic points, the expense ratio cost will be $0.1 for $100 investment and $1 for $1000 investment. Also ETFs do not have any sales charges, low-balance fee or purchase fees, which some mutual funds include.
As ETFs are traded just like stocks, they include trading brokerage fees, which can be of per trade or per share basis. For keeping the effect of trading costs minimum, the investor should trade ETFs in larger amounts less frequently preferably through a discount broker offering low charges. For example, if the flat fee of trading is $10 per trade, investing $100 in ETF monthly will result in 10% disappearance of money ($100 - $10) and after a year the portfolio value should be $1080 (90%); if the value of ETF stays same. But if the investment is done tri-monthly basis ($300 per trade) then the portfolio value after a year should be $1160 ($290 x 4).
NobleTrading.com Offers Online Stock Trading, Online Options Trading
Online Futures Trading, Online Forex Trading
Worldwide Brokerage Service, Day Trading Brokerage
posted by Daniel Pipitone at
5:07 AM
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