As a physician settling into your career, you should begin setting up the building blocks of your financial strategy. Put a plan in place for paying down student loans. Set up retirement accounts. Look into insurance. Develop a strong and diversified investment portfolio. Granted, many of these items overlap and need to be planned in conjunction. But to get started, you need to understand the options available to you, and one of them is exchange traded funds (ETFs).
There was a great deal of fanfare when ETFs first appeared on the scene. According to NerdWallet, an ETF offers the promise of combining two very popular asset classes—mutual funds and individual stocks. Physician investors who are active traders prefer stocks because they are easily traded. However, mutual funds can also be attractive because they contain several stocks, which can provide diversification. Because mutual funds are basically a bundle of stocks or commodity shares, they cannot be traded in the same way a single stock can be traded.
ETFs offer the best of both worlds. You have more than one stock bundled together, offering diversification, while mimicking the ease of trading offered by stocks. In effect, you can buy and sell ETFs throughout the day, giving you the leverage to take advantage of trends or new information.
Whether or not an ETF is appropriate for your investment portfolio really depends on whether you value the flexibility of trading throughout the day. As a busy physician, you may not have the time to monitor the fluctuations of the market throughout the day. If this is the case, then you may not need the trading convenience offered by ETFs—convenience that does come at a cost.
Expense ratios may not be the only costs incurred by using an ETF. You may also have to pay commission fees from online brokers. If access to funds is important to you, you may have a harder time unloading an ETF because some aren’t traded frequently. Also, there is a risk that the ETF may shut down if it cannot meet its overhead. When this happens, traders may be stuck selling at an unfavorable price, or they may incur an unexpected tax hit.
The best way to decide if ETFs will work for you is to sit down with your financial planner and walk through the pros and cons of the asset while keeping in mind your habits and goals as an investor.
