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How Long Should You Hold an ETF?

ETFs are often considered one of the safest long-term investment options, but the most successful ETF may not be the ideal addition to your investment portfolio if it doesn’t otherwise align with your expectations in terms of returns, time horizons, and diversification.

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Choosing the Right ETF Holding Period

The general rule of thumb is that if you’re after a short-term capital gain, you should retain an ETF for up to one year. Investors focused on longer-term yields can use a buy-and-hold approach for as long as they wish. However, even the most accurate stock predictor will indicate that investors should consider closing their position if their returns simply aren’t sufficient or the ETF is too closely focused on one limited sector or asset pool. 

Like all assets and financial instruments, ETFs are subject to fluctuations, and because, by their nature, ETFs are exchange-traded, their value is affected by countless influences, which can alter the potential bid and ask prices during every trading day. Many long-term investors sell their ETFs to cash in their funds at a predetermined date or event, such as on retirement or when their circumstances dictate the need to sell ETFs to extract capital gains.

How to Time ETF Trades

The best time to buy is usually when the market is down and traded assets are available for a lower price–the basic principle is that markets always course correct, and when markets are up, your ETFs will become worth considerably more. Returns comprise both dividends and capital gains, so there is scope to reinvest dividends into further shares or alternative investments while rebalancing risk exposure across your portfolio.

Of course, selling as a knee-jerk reaction due to market volatility is rarely a wise move since a medium to long-term ETF investment will ride out the storm. Selling when your assets are down-valued is an easy mistake to make, crystallizing losses, so timing can be particularly crucial during instability.

However, moving quickly may be useful when ETFs hit new highs because they often experience strong initial rallies with good returns before falling back to a more sustainable position.

Can Investors Use ETFs to Generate Short-Term Gains?

Although the typical approach is to use ETFs as a buy-and-hold investment, there can be scenarios where an ETF is a safe bet as a short-term asset, with the potential to generate income by leveraging unused cash to achieve higher returns than standard savings interest rates.

Short-term bond ETFs are also a possible option and can add diversification to balance out other portfolio components held on a similar short-term basis. ETF selection will differ for every investor, but as a short-term opportunity, it is important to consider the liquidity of the shares, which aligns with whichever instruments underpin the fund.

For example, ETFs based on asset pools within high-trading volume indices are normally easy to sell and have excellent price transparency, but bond-based ETFs are considerably less liquid and, therefore, might not be a great option to generate short-term returns.