A Beginner’s Guide to Investing in Exchange-Traded Funds

A Beginner’s Guide to Investing in Exchange-Traded Funds

Exchange traded funds or ETFs are security that involves numerous securities such as stocks that track an underlying index. This type of investment allows you to invest in any number of industry sectors or utilise various strategies. In many ways, ETFs are comparable to mutual funds. With an ETF, you can share trade throughout the day, similar to regular stocks.

Key points to consider

Consider an exchange-traded fund or ETF as a basket of securities that trade by exchange similar to a stock.

Keep in mind that ETF share prices vary throughout the day. Thus, it differs from mutual funds, which are only traded once per day after the closing of markets.

An ETF contains every type of investment, which includes stocks, commodities, and bonds. In some cases, it offers US only holdings, while they offer international options in some cases.

It is also beneficial that ETF offers lowered expense ratios and broker commissions compared to individually buying stocks.

Exchange traded funds or ETFs are also considered more cost-effective and liquid than mutual funds.

ETF also holds manifold underlying assets rather than a single one, as in the case of stocks. Since there are numerous assets in an ETF, it is a popular choice when you want a diversified portfolio.

With an ETF, you can own hundreds and even thousands of stocks across various industries. You also have the choice of being isolated to one particular industry or sector. Some funds have a global perspective. Banking focused ETFs include stocks of banks across the industry.

Types of ETFs

There are numerous ETF types that investors can take advantage of, which can be utilised to generate income speculation, price increase, and offset the risk in portfolio investment. The following are several types of ETFs.

  • Bond ETFs

These bonds include government, corporate, as well as state and local bonds.

  • Industry ETFs 

This type tracks a particular industry such as technology, banking, and the oil and gas industry.

  • Commodity ETFs

Commodities invest in supplies such as crude oil and gold.

  • Currency ETFs

This type of ETF invests in foreign currencies such as Euros and Canadian dollars.

  • Inverse ETFs 

An inverse ETF attempts to gain an advantage from stock decline by shorting stocks. The process of shorting is selling a stock that is expected to decline in value and then purchasing it again at a lower price.

Investors must be aware that numerous inverse ETFs are simply not true ETFs. An ETF is a form of bond that trades similar to stock and must be backed by an issuer such as a bank. It is crucial to consult with a broker to examine if an ETF is the right fit for your investment portfolio.

How to buy and sell ETFs

ETFs are traded via online brokers, as well as traditional broker-dealers. You can check some of the top brokers in the industry for ETF online. An alternative to brokers is Robo-advisors, which are also available online. Check services such as Betterment and WealthFront who utilise ETF in their investment products.

Conclusion

If you want to invest:

  1. Do not be limited by stocks.
  2. Consider ETF, the top advantage of which is allowing a more diversified portfolio.
  3. Choose from the several types of ETFs that serve your interest and investment strategy.
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