A splendid example of an ETF is S&P 500 ETF. This ETF tracks the S&P500 index. Therefore, if you buy an ETF belonging to the S&P500, your cash will be automatically placed in the 500 firms that are within the index. Since the ETF is marketable security, it has a price associated with it, which allows it to be bought and sold. Furthermore, ETFs tend to be more cost-effective and liquid than other kinds of funds such as mutual funds. However, just like any other kind of investment, ETFs carry varying levels of risk. Therefore, ensure that you evaluate them carefully before you can buy and sell them.
Different ETFs
There are several types of ETFs. The most common Exchange-Traded Funds include:
- Stock ETFs: Stock ETFs contain a portfolio of stocks. They are comparable to any stock index. Just like regular stocks, you can buy and sell them for a profit. They are also traded on the stock exchange during the day.
- Index ETFs: Index ETFs tend to mimic a particular index. For instance, S&P 500 ETF mimics the S&P500 Index. Additionally, such ETFs cover particular stock classes, sectors, or even foreign and emerging stock markets.
- Bond ETFs: These are ETFs that are primarily invested in bonds. They may focus on one kind of bond or offer a broad portfolio of diversified bonds with several varying dates of maturity.
- Commodity ETFs: These ETFs are tied to physical commodities. These physical commodities include precious metals, agricultural goods, or natural resources. An example can include a gold ETF that may have ETFs related to physical gold or stocks in gold processing companies.
- Currency ETFs: Currency ETFs are tied to either solo currency or a combination of several currencies. They are usually utilized by investors who want to gain exposure to the forex exchange market without having to directly trade in it.
- Real-Estate ETFs: Real Estate ETFs are tied to REITs (Real Estate Investment Trusts), real estate development companies, and MBS (Mortgage-Backed Securities). They can also include real physical estates, anything from commercial properties to undeveloped land.
A Step-by-Step Procedure on How to Invest in ETFs
ETFs are a definite choice for investors who need something low cost and liquid. Compared to mutual funds, which are actively managed, ETFs offer relative performance, which could shift to a higher retirement balance in the long-term. Here is how you can invest in ETFs.
Brokerage Account: You will require a brokerage account to allow you to sell or buy any ETFs. You can get your brokerage account with a broker account or via a Robo-advisor. Most online brokers offer commission-free ETF trades. Make sure to compare the different features offered with each platform. If you are new to ETFs, consider going with a platform that offers an extensive range of coaching/education items.
1. Pick Your ETFs
Once you have set up your brokerage account, it is time for you to pick your first Exchange-Traded Funds. If you are new to ETFs, passive index funds make a great first choice. They are cheaper than mutual funds. Moreover, you want to make sure that you pick ETFs that touch different assets. For instance, you can create a portfolio that focuses solely on stocks, bond ETFs, or both. Just use a strategy that is within your goals and timeline.
2. Watch Your ETFs Work
Unfortunately, new investors have a terrible practice of constantly looking at their portfolios far too often. For this reason, they make emotional reactions to major market moves. They tend to over-trade. The best thing you can do once you have purchased your ETFs is to forget them and let the ETFs work for you. Since they are long-term investments, let them produce investment growth in the long-term.
Pros of ETFs
- Liquidity: Since you can purchase and sell during a trading day, ETFs tend to be more liquid than managed mutual funds, which you can only buy or sell at the very end of trading.
- Low Transaction Costs: Compared to mutual funds, ETFs have a lower expense ratio. This is particularly because of their exchange-traded nature. Mutual funds attract commissions.
- Market Accessibility: ETFs have allowed investors to venture into markets that were once difficult for individual investors to access. Such markets include the foreign exchange market, crypto market, commodities market, etc.
- Tax Efficiency: ETFs have a critical advantage over managing mutual funds when it comes to tax consideration. They provide investors with the ability to avoid short-term capital gains. Such capital gains attract higher tax rates.
Cons of ETFs
- High Exposure to Risk: ETFs provide exposure to assets that were previously unattended, which could introduce risks that new investors may not have experience with.
- Trading / Transactional Costs: ETFs are exchange-traded. Therefore, they may be subject to fees from online brokers.
Bottom Line
If you want an excellent way to build a diverse portfolio, then you might want to consider ETFs. Because of their versatility, liquidity, and low trading costs, they have become a popular investment vehicle. We urge you to explore the varied offerings of ETFs and consider adding ETF investments to your portfolio.
