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ETF Trading Amount

Investing small amounts in ETFs should be addressed with great caution despite the many benefits that this type of investment offers. The buying and selling of ETFs is done through the services of brokerage houses, which means that transaction fees are an indispensable part that cannot be avoided. If you make a big transaction the effect of the fees is alleviated. However, for small transactions these fees may have a significant impact on you assets. Thus, it is recommended that you start investing only after you have allocated at least $1 000 for the purpose.

Many investors prefer to apply dollar cost strategies. They represent the adding of fixed amounts to the account on regular bases for the purpose of constant savings and diversifying returns. However, this strategy entails higher transaction costs even though you may use the services of a discount brokerage firm. The investment in a traditional mutual fund will result in higher amounts in the account and returns per year after cost than an ETF. This will be caused by the transaction costs that will occur due to dollar-cost averaging by small amounts under the ETF conditions.

On the other hand, if large amounts are invested on regular bases, the negative effects of transaction fees are eliminated. As a result the better performance of the ETF is driven by the tax advantages offered and smaller fees that are incurred.

Thus, it is reasonable to invest large amounts in an ETF on regular bases or deposits per fund that exceed $1000. A traditional mutual fund is recommended or the making of less frequent deposits for such investors. Another option is the keeping on the interim the cash that is in the money market account. As a result of the latter strategy the investor's exposure to equities and the resulting higher return and potential risk is alleviated.

More money is paid in the form of commissions when an investor executes frequent trades. The returns of the portfolio will be greatly reduced if an investor contributes to several ETFs, since s/he will incur multiple transaction fees.

Some index fund providers charge low account fees. Additionally, if an investor decides to use the services of a brokerage firm to invest in a mutual fund, s/he will incur additional fees.

So, in order to decide whether you should invest in an ETF or an index you should consider the following factors:

  • Money available for investment
  • Number of funds involved
  • Broker commission fees
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