An Exchange-Traded Fund, or ETF, is a security that tracks an underlying index, such as the S&P 500. ETFs can be bought and sold on an exchange, just like stocks. They are often used as a way to diversify a portfolio, since they offer exposure to a number of different stocks or assets.
How do ETFs work?
An ETF is a security that tracks a basket of assets and can be traded on an exchange. It is similar to a mutual fund, but can be bought and sold throughout the day. This makes it a more liquid investment than a mutual fund. ETFs are often used to track indexes, such as the Nasdaq 100, and can be bought and sold in small increments, which makes them attractive to investors who want to dollar-cost average their investment.
What are the benefits of ETFs?
An ETF holds baskets of securities that match the composition of the underlying index. When you invest in an ETF, you are buying a piece of the basket. This allows you to invest in a diversified portfolio without having to purchase all of the individual securities that make up the index.
What are the risks of investing in ETFs?
The risks of investing in ETFs are similar to the risks of investing in any other type of security. The main risks are that the price of the ETF could decline, causing losses for investors, and that the underlying assets could lose value, causing the ETF to decline in price.
> See also: What is Your Risk Tolerance?
Types of ETFs
There are many different types of Exchange-Traded Fund (ETF), and each type has its own set of benefits and drawbacks. The most common type of ETF is the index fund, which tracks the performance of a specific index, such as the S&P 500 or the Nasdaq Composite.
ETF types and examples:
- Passive or Index Funds: These ETFs track an index, such as the S&P 500. They are designed to replicate the performance of the index. In general, passive management is simpler, and therefore, these indexed ETFs have low fees.
- Active Funds: These funds are managed by a team of investment professionals who attempt to beat the market returns. They tend to have higher fees than passive funds. – See more: What is active investment management?
- Exchange-Traded Notes (ETNs): ETNs are unsecured debt obligations of an issuer, such as a bank or brokerage. They are traded on exchanges and provide investors with exposure to the returns of a given benchmark or strategy.
- Actively Managed Futures: Actively managed futures ETFs hold futures contracts rather than stocks. This gives investors exposure to commodities, currencies, and other assets.
- Commodity fund: which invests in physical commodities such as gold, silver, oil, and wheat. Commodity funds can be a good way to hedge against inflation.
- Other ETFs: There are also ETFs that invest in foreign stocks and bonds, real estate, and even alternative investments such as hedge funds and venture capital.
How to buy an ETFs?
You can buy and sell ETFs just like stocks, and they are traded on exchanges like stocks. Most brokers offer a variety of ETFs for investors to choose from (see above). Some brokers allow you to invest in ETFs commission-free.
- Learn more: How to Chose your Broker: 4 Critical Things to Consider (Checklist).
- Feel free to check our Investment Platform Review to chose your Broker or Exchange.