Why Buying ETFs Makes Sense in a Volatile Stock Market

March 3, 2023

Investing in the stock market can be a great way to grow your wealth over the long term.

However, investing can also be risky, especially during a volatile period for the market.

With more and more investors bracing for a potential recession, the stock market’s volatility has been picking up.

After a positive start to the year, the US equity benchmark index has given up most of those gains after closing in the red for February.

This can be a difficult time for investors, but there are some strategies that can help minimise the risks and maximise the potential rewards.

One of these strategies is to invest in Exchange-Traded Funds (ETFs). Here’s a breakdown of why buying ETFs during market volatility can be rewarding.

1. Diversification

As we know, ETFs offer investors a diversified portfolio of assets.

This can help reduce the risks associated with investing in a single stock.

In a bear market, when individual stocks are more likely to decline in value, a diversified portfolio can help minimise losses.

2. Lower costs

ETFs typically have much lower fees than mutual funds, which can help increase returns over the long term – by avoiding fees that erode your capital.

During a bear market, when returns are likely to be lower, every bit of cost savings can help.

3. Flexibility

ETFs can be traded throughout the day, just like individual stocks.

This means that investors can take advantage of market fluctuations and make trades whenever they see opportunities.

During a bear market, when stock prices are more volatile, this flexibility can be especially valuable.

4. Liquidity

ETFs are highly liquid, which means that investors can buy and sell them quickly and easily.

During a bear market, when investors may need to access their funds quickly, this liquidity can be especially important.

Investors, however, should be careful if they were to sell their investment at a loss.

It’s advisable to be able to hold your investment for at least five years.

5. Access to different markets

ETFs can provide investors with exposure to different markets and asset classes.

For example, an investor could invest in an ETF that tracks the performance of the entire stock market or an ETF that invests in a specific sector, such as technology or healthcare.

During a bear market, when certain sectors may be more heavily impacted than others, this flexibility can help manage risk.

ETFs can be a smart strategy in a bear market

Overall, investing in ETFs can be a smart strategy during a bear market.

By providing investors with a diversified portfolio, lower costs, flexibility, liquidity, and access to different markets, ETFs can help minimise risks and maximise returns.

However, you should always do your own research and consult with a financial advisor before making any investment decisions.

Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.

Billy Toh

Billy is deeply committed to making investment accessible and understandable to everyone, a principle that drives his engagement with the capital markets and his long-term investment strategies. He is currently the Head of Content & Investment Lead for Prosperus and a SGX Academy Trainer. His extensive experience spans roles as an economist at RHB Investment Bank, focusing on the Thailand and Philippines markets, and as a financial journalist at The Edge Malaysia. Additionally, his background includes valuable time spent in an asset management firm. Outside of finance, Billy enjoys meaningful conversations over coffee, keeps fit as a fitness enthusiast, and has a keen interest in technology.

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