Quote:
Originally posted by zf0enix
My question would be regarding using ETFs as an asset allocation strategy, as opposed to REITs or Treasury funds. I like the idea of an ETF, but I haven't done enough research to determine which class I like (small, mid, large cap etc.)
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When you start talking about investing in ETFs (Exchange Traded Funds, for those who don't do acronyms), what you're essentially saying is "I'm betting on the market as a whole." That is, if you buy the Q's, you're betting on strength in the techs, if you buy spiders, you're betting on the S&P, and so forth. Now ETFs can be attractive, but there are some disadvantages:
1)You're tying your money to the market. If the market stays down (which it has), you go down with it.
2)Unlike a mutual fund or diverse stock holdings, ETFs don't neccesarily pay dividends (though some do).
#2 isn't as strong of a disadvantage as #1. Basically, before you invest in an ETF, you have to ask yourself "is this sector of the economy going to outperform my savings account over the next 6 months/12months/10 years." In the short run, the 6-12 month period, my feeling personally is that the stock market is still overpriced and ETFs will sink with it. If, however, you're talking about the long term, stocks generally rise and ETFs are a low-cost, low-overhead way to diversify holdings. In terms of REITs, you have to ask yourself the same question about real estate. If the bubble bursts, a lot of people who've ridden REITs over the past 2 years are going to get soaked.
Bob