ETF Dollar-Cost Averaging

Exchange-Traded Funds (ETFs) are composed as mutual funds, but traded intraday as stocks. While mutual funds can be traded only once a day, with the net asset value being required to be recalculated before any further trades, ETFs can be traded throughout the day. Another important benefit which an ETF holds over mutual funds is the expense ratio. Mutual funds have always had a higher expense ratio than was palatable to investors. Because ETFs have no portfolio managers fine-tuning the assets, the fees charged are lesser than those with mutual funds, and investors can invest more money which otherwise would have ended up as management fees.

Investors implement a variety of strategies to put together high performing and stable portfolio including market timing and dollar-cost averaging (DCA). Mutual fund owners have always been attracted to dollar-cost averaging as a means of achieving long term investment performance. The way DCA works is that investors buy fewer shares when prices are high and more shares when prices are low. As time goes on, the average cost per share keeps falling lower and lower. DCA works better when investors regularly purchase and add quantities of shares to their portfolios. This in turn means that you need an investment vehicle which has relatively lower expense ratios and transaction costs – Which is always a good thing for investors, anyway.

Please note that ETFs may not necessarily be the best choice for low expense ratios and DCA. This is especially valid if brokerage firms assess the transaction fees, adding to the low expense ratios of the ETFs. Even if the discount brokers add a flat fee per transaction, it makes dollar cost averaging an expensive proposition to investors who want to keep adding small amounts regularly to their investments. Also, ETF managers may be charging differing annual and other one-time fees including low balance, purchase and redemption fees.

This might lead us to suggest longer intervals and larger amounts for the regular purchases, to lessen the impact of transaction fees. Instead of purchasing tiny amounts monthly, ETF investors can still implement dollar cost averaging by purchasing equal amounts of a share once every six months or even annually. Over an extended period, the combined benefits of low ETF expense ratios and dollar cost averaging tend to produce an investment which is significantly over performing. You are advised to consult with your financial planner and understand all the costs and benefits of investing in exchange-traded funds and implementing dollar-cost averaging.