If you're just getting started in the stock market or have been investing for a while, you might have heard the term ETF. ETF's function like stocks in that they are a security whose value fluctuates, but how they work behind the price is much different than standard stocks. Put simply, exchange traded funds or ETFs are securities that are made-up of a bunch of other securities, usually individual stocks. In short, ETF's track the fluctuation in prices of a bunch of different stocks, usually stocks in certain categories like technology, food and beverage, mining, etcetera. ETFs trade just like normal stocks on open markets, but provide investors a great level of security and less volatility as compared to singular stock purchases.
ETFs are very similar to mutual funds, except that mutual funds aren't listed on exchanges and ETF's are. If you want to put your money away into a safe security and diversify your risk, ETFs are the way to go. Common ETFs are the SPY or the ETF that tracks the S&P 500 companies all-in-one security or DIA, and ETF that tracks the Dow Jones Industrial average. It's important to note that these ETFs are simply a collection of the companies that these indexes contain, and while they track the price movement of each respective index of companies, the ETF's aren't the indexes themselves, they're the security. In summary, ETFs are a group of stocks or securities lumped together into one security. Their prices fluctuate just like stocks, but their volatility, or their change in price over a given time, won't be as extreme as individual stocks. There's ETF's for everything from crude oil to electricity, from food to water, ETFs OfferUp the exposure of a ton of different companies like Amazon, Tesla, Google, etc without having to shell out the hefty price of owning each of those stocks individually. If you want to take a more conservative long term investment strategy, ETF's are likely the best way to go. Owning significant portions of individual company stock can provide greater return, but it goes the other way too. You could end up losing all of your investment in a company, but not so much in an ETF. The risk is muted. Now that we've gone through the basics of what ETFs are, let's take a look at the different types of exchange traded funds.
Like we mentioned before, ETFs come in all sorts of shapes and sizes, and you can likely find one that covers exactly what you want to invest in. There are bond ETFs which are made-up of government and corporate bonds, industry ETFs which track industries like technology banking or oil and gas commodity ETF's which track the prices of crude oil, gold, silver and other valuable resources. Currency ETFs which track the changes in value of various currencies. Like the euro or U.S. dollar and inverse ETFs, which gain in value when a group of stocks go down. These ETFs essentially short the underlying stock or bet against them and go up in value inversely to the stocks. When looking for ETFs on the open market, you should note that many of them are not actually ETFs, but rather exchange traded notes or etns. While ETFs actually own the underlying stock or security, etns are just securities issued by banks guaranteed to track the underlying index without actually owning the underlying securities as part of the ATM. In all actuality, ETN and ETFs function the same for investors.
But when you buy an ETN, just be aware that you're buying a guarantee from a bank, not the actual securities that it tracks. ETFs provide investors lower costs to purchase a wide variety of companies. You could buy a technology ETF hypothetically for $50.00, but if you wanted to purchase all of the underlying stocks individually you might need something like $10,000. At the end of the day you get the same return rate but with much less upfront investment to get the exposure to those companies. Most ETFs have very low expense ratios. ETFs at the end of the day are funds and portfolios and require some sort of pension from bankers unlike individual stocks. This means that some ETFs can have fees for ownership, but in general they're very low. ETF's that track indexes will have very low expenses because they don't have to be actively managed. However, if an ETF tracks something like crude oil, it could have high fees as intensive management is needed for the underlying security, in that case crude oil. The pros of ETFs are that they give you access to entire industries cheaply, give you access to companies and large collections of stock with lower upfront costs, and provide greater risk management to your portfolio as diversification is built in. The cons of ETFs are that they can have high fees compared to stock ownership, can still limit your exposure to the market if you over invest in one industry and they don't have as much liquidity, IE there's not.l as many people looking to buy them, ETFs are a great first foray into investing for any beginner and can be a great long term way to build wealth. If you want to buy some ETF's or get started in investing, you can do so through Robin Hood or Weeble. Both are free stock trading platforms that will give you free stocks just for signing up. If you follow their official website links, you can get a free stock valued anywhere from 12 to $1400.
Comments
Post a Comment