I'm not sure if everyone has noticed, but recently, more and more retail investors around us have started to participate in the investment of exchange-traded funds (ETFs) within the market.
Originally, many investors looked down on ETFs, thinking that ETFs are funds, and are just there to take over the market, but now they have all joined the ETF army.
Especially the trading activity and overall trading volume of exchange-traded ETFs have significantly increased.
Many friends come to ask me what stocks to buy, and I also tell them, why not buy an ETF?
The future trend of stock trading will shift to the leading stocks of various industries, plus the ETFs of various industries.
Leading stocks are publicly listed companies recognized by large capital, with relatively large trading volumes and clear company logic.
These stocks account for at most 1/20 of the entire market, which is about more than 200 companies.
Next, there are the ETF funds of various industries, representing the direction of various industries.
As for the remaining stocks, most of them will "fight on their own". If they don't have good themes and performance, they will be "put into the cold palace".
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It can't be said that there will be a lot of penny stocks in the future, but it is highly likely that there will be a lot of stocks that no one cares about in the future.Individual investors who wish to achieve success in the stock market in the future may find that Exchange Traded Funds (ETFs) are an indispensable direction to consider.
The essence of an ETF is a basket of stocks. This means that you do not need to select individual stocks; instead, you purchase an index that includes the constituent stocks of that index. In other words, buying an ETF eliminates the hassle of stock selection.
There are both advantages and disadvantages to this approach.
The advantage is that it is worry-free and less likely to encounter pitfalls, with the potential to outperform the overall industry in the long run. Purchasing an ETF means that you no longer need to select individual stocks, which is certainly a time-saving and effort-saving option.
When you are optimistic about a particular sector but are unsure which stock to buy within that sector, it can be quite painful. Investing in a single stock within the sector may yield high or low returns, with a strong element of uncertainty.Buying a few stocks scatteredly makes it no different from buying an ETF.
Moreover, the stock selection of ETFs is generally of lower risk, as they are all approved by the exchange to be included in the index, with a low probability of stepping on a mine.
Even if the worst happens and a listed company goes bust, the impact on the entire ETF will not be too great.
If you look from a long-term perspective, companies that can be included in the index can outperform the overall industry average.
If you follow the 28 phenomenon, the proportion of constituent stocks included in the ETF that can eventually outperform the ETF index is only about 30-40%.
Therefore, the advantages of buying ETFs for investors who are not good at stock selection are obvious.
The disadvantage is that there is no excess return, the fluctuation is small, and it is relatively mediocre.
ETFs are not all good, and there are definitely disadvantages.
Firstly, the fluctuation is small, and there is little excess return.
When rising, the stocks that rise the most are often the leaders in the sector, especially the small-cap leaders.Most small-cap leaders are likely not included in the index, and even if they are, their impact on the index is not significant.
This means that making a lot of money through ETFs is actually very difficult.
Stories of making several times, or even dozens of times, the investment in one year will definitely not happen in ETFs.
Some people define ETFs as "mediocre," which is correct, but it is also wrong.
After all, in the long run, the proportion of investors who can achieve an annualized return of more than 20% is actually a minority.
The actual volatility of ETFs can actually meet the return needs of ordinary people, but it is difficult to make a lot of money.
Index investing controls risk while also narrowing the returns, which are consistent.
The advantages and disadvantages of ETFs directly determine that it may be a more suitable tool for ordinary investors, compared to the ups and downs of stocks, compared to the complex research on listed companies, it is simple and clear, more suitable for ordinary entry-level retail investors.
Here's an important point, retail investors are more suitable for broad-based index ETFs, not industry index ETFs.For ordinary retail investors with limited investment capabilities and a history of frequent losses in stock trading, if you are considering investing in ETFs, it is advisable to prioritize broad-based ETFs over sector-specific ones.
This is because the fluctuation cycles of industries are often different from what most retail investors perceive. For instance, many retail investors believed that the pharmaceutical sector was promising two years ago, only to see it plummet. Later, they thought that new energy and photovoltaic sectors were good prospects, but these sectors continued to decline over the past two years.
On the other hand, sectors like coal, which have been on an upward trend for five years, seem to have a low proportion of retail investors, as if they are neglected by the public.
Investing in any industry that is at the forefront of the market carries a very high risk. If retail investors lack a proper understanding of the industry, the outcome can be disastrous.
This includes the recent surge in popularity of sectors like technology, AI, and artificial intelligence. Although these seem to be trends, no one really knows what will happen in reality. Once they enter a downward trend, the result can be a massive loss.
For retail investors, investing in sector funds is too risky because they often lack a deep understanding of the industry.When retail investors become familiar with an industry, it is often the peak of the industry, and it is time to prepare for the decline.
Therefore, broad-based funds are relatively simple for ordinary retail investors, especially the larger ones.
For example, most retail investors have a certain understanding of the Shanghai Stock Exchange Index, so the ETF of the Shanghai Stock Exchange Index is actually a very simple investment target.
Start building a position below 3000 points, and buy more as the price falls.
Above 3000 points, start reducing positions, and sell more as the price rises.
It is obviously unlikely to make a lot of money through this method, but the operation is simple and more brainless.
At least compared to the stock market, it is more reliable to make money instead of not making money.
In broad-based funds, those with slightly larger fluctuations than the Shanghai Stock Exchange Index are the CSI 300, Shanghai 50, and then you can look at the CSI 500, CSI 1000, or the ChiNext 50, and the Science and Technology Innovation Board 50.
Large broad-based index funds also have an advantage.
They will eliminate some stocks that have indeed encountered problems every year and replace them with a few new high-quality individual stocks.So, there is no need to worry about the occurrence of "explosive" situations in the constituent stocks of these indices, as they are dynamically adjusted.
Although broad-based indices also have market trends, they may rise and fall, but they do not have a long-term one-sided trend.
Behind the broad-based indices lies valuation, and valuation is actually the cycle of rotation.
Unless the economy takes an irreversible direction, otherwise, the valuation will rotate over a long cycle, rising and falling.
Then, investing in broad-based ETFs becomes an investment that can be won with just strategy.
Of course, this investment method requires a very high level of control and management of positions.
It also requires a certain judgment ability for the valuation range of broad-based indices.
But these are much easier compared to choosing stocks in the vast sea of stocks.
The uncertainty of listed companies is actually very high, especially after the implementation of the registration system, the difficulty of finding high-quality listed companies is increasing.
So, if you are still on the road of stock trading and have not found a stable profit method.You might as well start researching ETF investment quickly, after all, this path will definitely be a must in the future.
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