It’s a bit like a mixed salad
We don’t know about you, but we like our salads with some variety. A few leaves here, some tomatoes there, maybe some avocado and croutons? ETFs work in a similar way: they are a mix of securities in one “bowl”, which can be traded on the stock market as a whole.
What is an ETF?
A very trendy kind of investment, and for the right reasons. ETFs are funds holding a variety of securities, all while tracking a particular index (the most common one being the S&P500). By saying securities, we mean stocks, commodities, and bonds. Just think of it as a box with different flavors of chocolates. But the sweetest thing behind ETFs is that they can be sold throughout the day on the stock exchange, so that when the value of the chosen index goes up, so does the value of the ETF. ETFs do not require fund managers for trading, so the transaction just happens between traders at any given point during a trading session.
Don’t put all your eggs in one basket
Those eggs are like stocks. A stock is a single type of security, while ETFs are a mix of securities traded as a package. But how and who packages them? Large money managers are the ones in charge. They create a bundle of securities, and after going through a bunch of regulatory measures, they can sell their bundles to the public via brokers. ETFs are easy to trade, and have a low expense ratio, which is the cost to manage the fund. This is due to the fact that they are index-tracking funds, which basically means that a computer does the work. Oh, and last but not least, ETFs are tax efficient. Unlike mutual funds, but more on that here.
What’s your type?
ETFs are not all the same, there are a few different types ( and since we are talking about diversified assets, doesn’t it make sense?). There are five main types of ETFs, which track their own kind of indexes. One is a currency ETFs, where you invest in foreign currencies while tracking a currency indexes (we are looking at you Brexit pound). Then there’s a commodity ETF, in which assets such as gold and coal become investments, and Industry ETF, or an industry-bundle ETF, like a tech industry ETF. A Bond ETF is a bit more on the governmental level, and include, for example state bonds or municipal bonds. Lastly, we look at an Inverse ETF, which, if you remember from math class, is based on undoing what has just been done: in this case selling a stock because there is an expectation it will lose value, to then repurchase it at a lower price. A bit like returning a dress you didn’t like at full price, and buying it back on sale...
Why will your future self thank you?
Jack of all trades, master of none. ETFs allow for an investor to diversify their investments, all while tracking, and perhaps even learning about, different indexes. Also, many ETFs offer dividends, allowing for some extra income. They also tend to be very transparent since they disclose holdings on a daily basis.
- Back to ticker symbols: what does ETF stand for? The Aberdeen Emerging Markets Smaller Companies Opportunities Fund.
2. In relation to its GDP, Saudi Arabia is the largest country without a US-dedicated ETF fund.
3. 1 week: average holding period for a SPY (and we aren’t talking about James Bond).