A Beginner’s Guide to ETFs
By Valentine Schmitt
August 23, 2022
What acts like a mutual fund, trades like a stock, and has taken over the financial markets for the past 15 years? It’s called an ETF, which is short for exchange-traded funds. It is a basket of securities that tracks an industry or index.
This is part of the emergence of “passive investing,” in which investors choose to hold large baskets of assets rather than hire a fund manager to choose between companies. Vanguard founder Jack Bogle promoted passive investing, which is why index funds—mutual funds that monitor an index—became so popular among savers.
This guide will help you better understand ETFs and how they are traded.
What are ETFs?
An ETF, or exchange-traded fund, is a basket of securities that trade on an exchange the same way that stock does.
ETFs are fusion investment vehicles that can provide moderate and tax-efficient exposure to assets (equities, bonds, and commodities) and investing techniques. Most ETFs, like traditional mutual funds, invest in a diverse portfolio of equities and bonds. ETFs, however, differ from ordinary mutual funds in that they are traded on a stock exchange.
Types of ETFs
ETFs can hold various investments, such as stocks, commodities, or bonds. Some solely offer assets in the United States, while others are global. ETFs are classified into three types:
- U.S. Equity ETFs
- International ETFs
- Sector ETFs
- Bond/Fixed-Income ETFs
- Allocation ETFs
- Commodities ETFs
Some ETFs can be categorised according to their speciality, such as:
- Currency ETFs
- Sustainable ETFs
- Factor ETFs
How Do ETFs Work?
One of the primary advantages of ETFs is that they are not unduly complex. ETF shares, like individual securities, are exchanged throughout the day at varying prices based on supply and demand. This means that their stock price can fluctuate, as opposed to mutual funds, which are only exchanged at their net asset value at the end of the day.
How to Invest in ETFs
To begin investing in ETFs, take the following steps:
- Open a brokerage account: To buy and sell ETFs, you’ll need a brokerage account, just as you would for individual equities. Make sure you conduct your research to determine which brokerage business and account type are best for you.
- Use screening tools to search and compare ETFs.
- Do your research and place the trade
- Sit back and relax
In summary, ETFs can provide a powerful way to create portfolios that take advantage of various market conditions. Plus, they are more tax-efficient alternatives to mutual funds. For investors seeking broad and traditional approaches to their portfolios, ETFs will likely prove to be a smart choice. But for investors who want more sophisticated, customised strategies that go beyond simple market exposure and asset allocation, mutual funds may still be the best choice—for now.
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