An Exchange-traded Fund (ETF) allows you to invest in a basket of individual stocks or bonds with relatively lower risk.
What is an Exchange-traded Funds (ETF)
An Exchange-traded Fund (ETF) is a type of investment in which a group of individuals pool their money to buy a basket of stocks or bonds, that are selected and managed by a professional investment team. When an individual buys an ETF share, that money in invested in stocks or bonds held within the ETF.
Why should I invest in ETF
ETFs provides an easy option to diversify across multiple investments for those individuals who are not interested in researching and buying individual stocks or bonds. It is specially handy for those who are new to investing or want hands-off approach. Additionally, you get a professionally managed team that runs the ETF based on a specific goal.
How can I buy ETF?
The easiest way to buy ETF is by opening an account in an online brokerage firm. You start by depositing cash in your account, research on what ETF you are interested, buy and hold them, and sell as per your financial needs.
What are different types of ETFs
There are multiple types of ETF, each designed to meet a specific investment goal:
- Stock ETFs – Invest in company stocks from certain industry, country, or region.
- Bond ETFs – Invest in bonds from corporation, government or municipality.
What are the advantages of ETFs
Advantages in investing in ETFs are:
- Convenience – You can buy or sell ETFs any time during the day on stock exchange
- Diversification – You hold a variety of stocks/bonds at a lower risk and cost than individual ones
- Professional Management – A professional team will manage individual stocks/bonds within the ETF
What are the disadvantages of ETFs
Bear in mind that you will be paying a fee to the professional team to manage ETF. This fee will impact the overall return of your investment. Additionally, you will have no control over the individual stocks or bonds within the ETF. Remember, ETFs are not FDIC insured, meaning unlike Bank CDs, you may lose your money in the investment.
How do I manage risk of investing in ETFs
There are multiple options to lower risk of ETF investing:
- Buy Index-based ETFs that tracks an index (Ex. S&P 500)
- Buy ETFs of an industry or country with which you are familiar
- Employ Dollar Cost Averaging, that involves buying ETFs with a fixed dollar amount each month
What is the difference between ETF and Mutual Fund
Exchange-traded funds (ETFs) are a hybrid between mutual funds and company stocks, with a main caveat that one can buy or sell ETFs throughout the trading day unlike mutual funds that only trade once after stock market closes.
Final Verdict
Though ETFs investment is considered safer than individual company stock or bond investment, they do charge fees that may lower expected returns. Make sure you discuss your financial situation with a registered financial advisor before making any investment decision.
We hope the information in this post will be helpful in your journey of aspiring nirvana!
Helpful Links: https://en.wikipedia.org/wiki/Exchange-traded_fund