You’ve probably never heard this word before if you’re not in the space of investing. If you're however in the investment community then you’re probably familiar with the word ETF, due to the recent offering of the first crypto ETF being Bitcoin.
Though many don’t know what an exchange-traded fund exactly is.
So, I’ll be the one to explain what an ETF is, the purpose, and what the benefits and drawbacks are in the world of ETFs. If you’re intrigued by ETF’s after reading this article, I'll explain a step-by-step way to invest.
Exchange traded funds allow the investment of multiple securities all at once.
ETFs are essentially a group of investments like stocks or bonds. Exchange traded funds allow the investment of multiple securities all at once.
They act as regular stocks, allowing them to be traded or bought and sold during normal market hours.
Think of an ETF as a regular stock registered with the normal Securities and Exchange Commision. Though instead of buying a single share of something, you’re buying multiple investments with only one instrument being the ETF.
First let's talk about the difference between passive and active ETFs. Majority of ETFs are passively managed meaning they’re designed to follow a broader index or sector of a group of stocks.
An example of a passive ETF would be SPY which follows the S&P 500. This means if the S&P goes up, then your SPY ETF rises with it vice versa.
On the other hand, actively managed ETFs are managed by a portfolio manager that can remove or add an asset at any given time. The main goal of an active ETF is to outperform the market index.
ARKK is an example of an active ETF. ARKK focuses on investing in companies at the forefront of scientific and technological advancements and innovations.
Equity ETFs are baskets of investments like shares. Equity ETFs are the most common, as mentioned earlier the definition of an ETF is a basket of bonds and shares. There are non-equity ETFs which I’ll talk about soon but for now I’m going to give some examples of the most common equity ETFs.
Sector ETFs are an example of an equity-based ETF. Sector ETFs are just ETFs that have an assortment of stocks pursuing a similar type of business or offering.
Another example would be international ETFs which are baskets of stocks that are outside or headquartered outside the United States.
Dividend ETFs are also equity based. Dividend ETFs are just stocks that have the history of paying dividends to shareholders.
Non-equity ETFs are similar to equity ETFs except instead of them being baskets of equity-based investments such as stocks, they’re bundles of securities. Some examples of the most common non-equity ETFs are.
Commodity ETFs - which are bundles of investments in raw materials. These raw materials are typically agricultural goods, energy, and precious metals like gold and silver. These tend to be on the risker side of ETFs.
Currency ETFs - are another example of non-equity ETFs. Currency ETFs could be an index that tracks a single currency or an assortment of multiple currencies worldwide.
The last main type of non-equity ETFs are bond ETFs. A bond ETF could be anything from a single bond issued by the government treasuries to private companies or financial institutions.
Now you know what an ETF is, what are some of the advantages and disadvantages of investing in them?
Diversification is one of the main leads that ETFs have. ETFs expose investors to numerous amounts of investments for the purchase of one single ETF.
Another edge that ETFs have is that they trade like regular stocks, meaning they can be bought and sold whenever during trading hours. Some other investments similar to ETFs do not offer this.
One last benefit of ETFs is their relatively low cost that they offer compared to other investments similar to ETFs. Mutual funds which are a similar investment are relatively more expensive when compared.
When buying equity-based dividend ETFs, you’ll likely receive lower yields. Dividend ETFs do usually have lower risk than buying the individual stock alone. But it is a con of reviving less yield from dividends.
Costs are higher for ETFs than buying an individual stock. The reason for this is stocks don’t have a management fee like ETFs do. Both will charge a commission to the broker, but stocks do not have management fees.
The benefits of intraday trading ETFs is a nice thing but can have negative effects. Intraday pricing could cause the chance of making an unwise trade. Make sure you’re always playing it safe in the markets.
ETFs and mutual funds are very similar when it comes to investments. So what's the difference between the 2? Both offer exposure to an assortment of stocks or securities, both being baskets of investment instruments.
Both ETFs and mutual funds can be actively managed by fund managers and passively managed.
The main difference between the 2 though is ETFs trade like regular stocks being able to be bought and sold throughout the trading hours. Mutual funds on the other hand are executed once per day after trading hours. This results in them all receiving the same price at the end of the trading day.
ETFs can be a great investment for long term and short term traders, since ETFs allow intraday trading abilities. They can be good for beginner traders as well since most beginner traders don’t know how to research individual stocks. They also require less time and effort since it's a bundle of investments rather than one singular stock.
Find your brokerage
Many brokerages offer the ability to buy and sell ETFs. A quick google search would give you the desired brokerages as well as the best one to use. You could go with a traditional brokerage or if you’re feeling different a neo-broker is an option as well.
Sign up for an account
After finding the desired brokerage, sign up for an account and boom you’re ready to go. Always do your own research though before going gong-ho and buying whatever ETFs look desirable. Make sure to be smart when investing.
Create or learn a trading strategy
Now the fun part, it's time to find the way you’re going to buy and sell ETFs. This could be just buying and holding for more long term investments. If you’re feeling a little risky and want to take a swing at short term, that's always an option when dealing with ETFs. Just be sure you’re being smart in your investment journey, never risk more than you can lose.