With ETF Assets crossing 4 trillion dollars, it has become clear in this day and age that ETFs are one of the most attractive products to be introduced into the Stock Market in the last few decades. ETFs or Exchange Traded Funds are an investable product, introduced in the 1990s, that has garnered a large amount of attention and praise from investors and market critiques. In this article, we will examine and clarify what an ETF is along with delving into some of its pros.
An Exchange Traded Fund (ETF) is a collection of securities that you buy or sell through a brokerage firm on a stock exchange. The securities underlying an ETF commonly track and follow an index, although this doesn’t limit the securities to be only stocks as ETFs are commonly comprised of a mixture of stocks, bonds, commodities and various other assets.
An easier way to understand an ETF would be to think of it as similar to a Mutual Fund, however, the key difference being that an ETF is listed on the stock exchange and thus is traded throughout the day at varying prices, making it far more liquid and easy to monitor than the average Mutual Fund. This liquidity and availability is where it derives the name “Exchange Traded Fund”.
Broad Market ETFs – These are the most popular form of ETFs and they tend to be the safest and most reliable for an easy ROI. These ETFs typically follow a large index, covering a massive part of the stock market, such as the FTSE 100 or the S&P 500, the SPDR S&P 500 is the largest ETF. Due to the broad coverage, these ETFs provide a large diversity and safety in exchange for a potential loss in speciality as compared to the other ETFs.
Bond ETFs/Fixed Income ETFs - These ETFs primarily advocate for a fixed income given at in interest rate in the form of treasury Bills and Bonds and thus the choice of these ETFs depends primarily on the Asset Allocation preferences of the investor.
Commodity ETFs – These are primarily composed of assets in the Commodity Markets and thus bear less exposure to the volatility of the Stock Market. An excellent choice for any investor looking to alleviate their portfolio of exposure, it is important to note that primarily trading in the Commodity Markets is don’t through futures and derivates, so a good grasp of that is needed to invest in this asset class.
Style ETFs – These types of ETFs are aimed primarily at growth and value investors, who expect to see their investments appreciate over the next few years, and are hence comprised of smaller to medium-sized firms.
International/ Foreign Currency ETF – These ETF s are designed to appreciate based on improvements in other county’s economies and stock markets and are a useful method of adding safety from a national crisis in your portfolio.
Lower expense ratios – ETFs contain a variety of investment instruments and since instead of purchasing all of these stocks individually, you are purchasing a single mixed asset, it saves a lot in terms of brokerage fees and expense ratios
Diversity – Having a range of assets helps mitigate any severe downturns faced by the market, protecting your portfolio and minimizing your losses. ETFs offer a level of diversity not available through most other assets.
Liquidity – Due to them being traded on the exchange, the funds are very liquid, as compared to Mutual Funds, and hence offer the investor with the opportunity to cash out anytime when and if needed.
Hopefully, you have gained a better understanding of one the relatively newer and more popular methods of investing through reading this article. Like all dealings in finance, ETFs to have their share of risks and cons, and thus should be thoroughly researched before investing in.