What is an ETF?
ETF stands for Exchange-Traded Fund. Think of it as a basket of assets that may include stocks, bonds, currencies, commodities etc. As an investor, rather than buying or selling each asset separately, you trade shares of the basket, which are available in stock exchanges, exactly like normal shares . This makes ETFs simpler than mutual funds, which only trade once a day.
The description alone probably gives you an idea as to why ETFs are so popular. First of all, you can diversify your portfolio by owning lots of different securities, without having to chase individual transactions since you buy them in a bunch. Secondly, with fewer transactions come lower fees. In fact, many online brokers offer zero commission on low-cost ETFs. Finally, ETFs are transparent and tax efficient.
So how do I invest in ETFs?
Start by using our comparison tool to find the best online broker for ETFs. Exchange-Traded Funds are simple products, so the next step is to decide which one to go for. Due to their increasing popularity, their number has proliferated but the least popular ones may be hard to liquidate. Still, there are plenty of options to choose from, such as:
- Index or Market ETFs track a specific index , e.g. the ever-popular SPDR S&P 500 ETF (SPY) tracks the S&P 500
- Commodity ETFs track the price of a single popular commodity , e.g. the SPDR Gold ETF tracks the value of gold
- Industry ETFs track the performance of a specific sector, e.g. technology
- Inverse ETFs focus on shorting to benefit from a falling market
- Leveraged ETFs multiply your capital to give you access to a larger position which you wouldn’t otherwise be able to afford
You may notice that most of these baskets of assets are passively managed so they’re built to track an asset without daily input from anyone. There are also actively managed ETFs which usually attract higher fees.
Once you create your trading account and decide which ETF to invest in, you can buy and sell exactly as you would with a regular stock. Apart from any profit made via trading, if your fund includes stocks from companies that pay dividends , you’ll be eligible for these as well. As with all trading, there’s always risk involved but Exchange-Traded Funds aren’t a bad place to begin your trading journey.
Bitesize basics
- ETF is an abbreviation for Exchange-Traded Funds
- These products are funds, i.e. collections of assets, which trade on the stock exchange like regular stocks.
- They’re popular with retail and novice investors because they’re diverse, simple, tax efficient and transparent. Also, in most cases, the fees are very reasonable.
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