ETFs or exchange-traded funds are essentially a basket of stocks that can be purchased as one unit. They are a convenient way to initiate and track your investment in a single sector or industry.
ETFs make it easier for investors to get exposure to particular industries or niches without spending time researching specific companies. There are also some tax benefits that come with investing in ETFs. These funds are available for many investments, including technology, healthcare, real estate, consumer goods, etc.
Sounds a bit overwhelming? Luckily understanding ETFs is not that hard.
This article will review what ETFs are, how they work, and why you might want to invest in them if you are looking into growing your portfolio beyond just general stocks.
An exchange-traded fund (or ETF) holds a collection of stocks, bonds, or other assets and trades like a stock on a stock market exchange. ETFs earn money by charging investors a management fee, a percentage of the fund’s total assets.
ETFs are similar to mutual funds, but there are some important differences that you should keep in mind when it comes to understanding ETFs. A mutual fund is bought and sold only once daily, at the end of the trading day. That makes it easier to buy or sell shares in a mutual fund than in ETFs, which can be traded throughout the day.
Unlike mutual funds, ETFs do not require investor subscriptions or share redemption at specific times. That makes ETFs a good choice when investors want to trade frequently.
Another key difference is that ETFs trade on a stock exchange and can be bought or sold at any time during the trading day. Mutual funds are only bought and sold at the end of the trading day.
How Do ETFs Work?
The first thing to know is that ETFs are passively managed – which means they’re not actively managed. An ETF tracks a specific index, asset, or baskets of assets, like a specific stock or sector. They can be based on an index like the S&P 500, a commodity like gold, a particular industry like healthcare, or a different type of investment.
There are many different ETFs that can be chosen based on your particular investment goals. This means an ETF does not try to “beat the market,” like many actively managed funds do (fail to do). They are simply purchased and held – like a stock. This makes them a convenient way to gain exposure to a particular index, sector, or commodity without spending much time researching specific investments.
Pros of ETFs
ETFs are a great way to diversify your portfolio and spread the risk associated with investing in a single stock. Since they track an index, commodity, or sector, you have exposure to various companies and industries without having to choose specific stocks yourself. This makes them a convenient way to gain exposure to a specific sector or type of investment you may not be familiar with.
ETFs make it easier to track your investments. You can simply track your ETFs as one unit rather than having to track each individual company. This can make your investment tracking much easier to do.
ETFs are also very inexpensive to own. Many ETFs have extremely low management fees or no management fees at all. This is a big advantage over actively managed funds, where the fees can be 2-3% or higher.
How To Start Investing In ETFs?
First, you’ll want to decide what types of investments you’d like to focus on. There are many different ETFs available for different types of investments.
For example, there are technology ETFs, healthcare ETFs, commodities, and more, so try and choose an ETF that matches your investment goals and risk tolerance. You can use numerous resources online to research different ETFs and decide which could be a good fit for you.
Once you’ve decided on a few, you may want to invest in, you’ll need to open a brokerage account. With the account, you can purchase shares of the ETFs that you want to invest in. You can buy as many or as few as you’d like. However, keep in mind that ETFs often have low share prices. This means that you’ll need a larger investment to buy a single ETF than you would purchase a single stock.
For example, you may need $10,000 to purchase a single ETF, but you could buy 100 shares of a single stock for only $1,000. As with stocks, keep track of all your investments in one place.
The Final Words
Exchange-traded funds (ETFs) can greatly add to your investment portfolio. They have passively managed funds that track a specific index, commodity, or sector and are inexpensive to own. You can use ETFs to diversify your portfolio and spread the risk associated with investing in a single stock.
You must open a brokerage account and purchase shares of the ETFs you want to invest in.