Updated: Nov 5, 2020
Exchange traded funds, or ETFs, are a type of fund that owns a number of other securities like stocks or bonds. Whether starting out as a new investor or even a long time investor, ETFs are a very simple yet effective way to diversify since one ETF can contain hundreds or even thousands of different assets across various industries.
Trades like a stock
Since ETFs are traded on an exchange, they trade like any other stock. The price fluctuates throughout the trading day and an investor can buy shares of that particular ETF during trading hours. There are no minimum investment amounts to buy into and ETF as with some mutual funds, save for the ETF price per share. In addition, since a single purchase is being made to get exposure to many securities, any possible brokerage commission is often much less than when separately buying each individual security that is in the fund.
ETFs can contain many types of investments such as stocks, bonds, commodities, or a mixture of them. Also, some are made up of U.S holdings only, and others have international securities.
Some ETFs are tailored to one individual sector, or to multiple sectors across multiple industries, or even whole indices such as the S&P 500 Index or the NASDAQ Composite.
ETFs offer different fund options for all types of investors such as income, growth, speculation, and even hedging.
Due to the price per unit, investing in individual bonds may be out of the question for many investors, but a bond ETF can make fixed income more simple to manage.
Passive and active ETFs
There are two basic kinds of ETFs: Passive and active. Passive ETFs, also know as index funds, simply attempt to track an index like the ones mentioned above, and since purchasing and selling is kept to a minimum, usually have a much lower expense ratio paid for the management of the fund.
Actively managed ETFs have a manager actively trying to beat an index by some stated metric (total investment return, variance of return, etc.) by trading the different assets within the fund. Active ETF expense ratios are therefore typically higher than index funds.
When deciding on which to pick from, it is beneficial to take into account your investment goal, how the fund is managed, what the expense ratio is, and to weigh the cost against other similar funds and the expected rate of return for the fund. Looking back at the history of the ETFs performance and comparing it to its index can help.
Two possible drawbacks to ETFs
Since an ETF is an assortment of securities, the potential for a higher return is often lower than owning concentrated positions in the individual securities themselves. Likewise, the potential for losses may also be lower than owning individual securities.
ETFs may have low expense ratios, but are still not free to own. By contrast, purchasing and holding an individual security (like a stock) has no built-in expense ratio.
Investing in ETFs is an easy and effective way to get exposure to all sorts of industries and sectors. They are easy to purchase and sell since they are traded on a stock exchange, and may offer a cheaper way to buy multiple assets at once. Using these types of investments are great options to use when building the core holdings of an investment portfolio. We offer custom-built investment portfolios containing ETFs and individual stocks. Contact us today to learn more, or click the button below to get started opening an account.
Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual. The economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Investing involves risk and you may lose your principal.