ETF investing is one of the hottest topics in the investing world right now and it’s making investors of all types a lot of money. If you’re not familiar with what ETF stands for, you might be thinking to yourself that it’s just some newfangled stock trading term that you’ll never actually need to know about. But that’s not true – in this article, we will explain what ETFs are, what is ETF investing and what are the basic concepts and benefits of it.
What is ETF?
ETF stands for Exchange Traded Fund. It is a type of fund that operates on the principle of index investing – buying and holding stocks in order to take advantage of the stock market’s returns as a whole rather than trying to time when to buy or sell the stocks individually.
Think of ETFs as a mix of different investments: stocks, bonds, commodities, and so on.
ETF Trading: What is ETF Investing?
ETF Trading is almost the same as stock trading.
When you are investing in ETFs you’re essentially buying shares of a collection of stocks instead of just one – for example, an ETF might be made up of 50 different companies that are trading on the New York Stock Exchange and NASDAQ. These stock investments are then put together into one “basket” and bought as one package unit.
ETF investments are extremely common these days and shouldn’t be overlooked if you have an interest in investing your work capital. Not only can they offer a great return on investment through relatively low risk, but many investors also find it extremely attractive because it allows them to diversify their holdings into various stocks while still consistently gaining a positive rate of return (versus just buying individual stocks).
Types of ETFs
There are many different types of ETFs you can choose based on the type of risk and investment returns that are most attractive to you, as well as your investment objectives. Here’s a quick breakdown of some of the most popular and commonly used ETFs:
- ETF Bonds
Bond ETFs are known as fixed-income investments that provide regular income to investors. They are more flexible – you can buy bonds from companies or gonverments. The performance of an individual bond is more volatile, but the risk drops when you diversify your portfolio over multiple bonds within a single bond ETF.
- ETF Stocks
ETF Stocks diversify your portfolio, unlike traditional stocks where investors buy shares in one company and are exposed to only that one company’s performance. With ETFs, you’re buying shares in a group of assets, such as a large collection of international stocks or all the companies within an industry sector.
- ETF Industry
ETF Industry allows you to add to your portfolio a pair of stocks from a specific business niche. Value is determined by the success of companies in the selected domain.
- ETF Commodities
Investors can also invest in precious metals through funds known as commodity ETFs. Unlike mining companies in which a company’s operations are dependent on a single resource, commodity ETFs such allow investors to diversify their portfolios over an entire class of commodities (gold, silver, bronze) with one purchase.
- ETF Inverse
The “Inverse” in ETF Inverse stands for the opposite of buying when prices are high.
The Inverse ETFs work on the “buy low, sell high” principle – basically, you sell stocks when the market is crashing (“shorting”) and then, buy new stocks at a lower price.
If ETF Inverse are doing well over time, the market as a whole must not be doing well.
- ETF Currency
ETF Currency are focused on currency pairs that often used as a way to control potential volatility and inflation.
Benefits of ETF Investing
ETFs allow any type of investor, regardless of their personal market knowledge or expertise, to buy into a diversified portfolio – the problem is that most investors don’t know about these securities and tend to shy away from them because they’re seen as too complicated. So here’s what you should know about the benefits of ETF Investing:
- Less Risky
Like all investments, ETFs are risky, but they provide more opportunities for growth over time and less risk than individual stock investing.
- An Investment Mix
An investment in ETF is actually an investment in 1,000+ different stocks all at once, ensuring that you can’t lose everything if one company tanks.
- Easier to Buy & Sell
ETFs have an associated price on the market and this makes them way easier to buy and sell.
- No Need to Analyze and Follow All Stocks 24/7
Another convenience is not having to choose what stocks to buy or sell at what times of day or night – you can do everything right on one ETF Platform where all your money is always working for you without having to give it any thought at all.
Aside from offering more opportunities for growth in the long run, ETFs also offer you the unique opportunity to time your investments. When to buy and sell is a very personal decision that involves emotion as well as calculation, and its two primary benefits are time-saving and convenience.
Investing in ETFs: How to buy ETFs?
The main way to buy ETFs is by purchasing the fund units (such as one share of the fund unit) directly through an investment adviser or broker, or directly from the ETF issuer. Instead of buying individual stocks separately, you can just purchase the holdings within the ETF, which greatly reduces transaction costs and maximizes total return on your investment dollar.
For investors into dividend-paying stocks, investing in an ETF makes sense because it’s like buying them all at once instead of individually. For example, if you were to invest $5000 into a dividend-paying-ETF, perhaps, you would be getting exposure to 500 different companies.
Brokers: ETF Platforms
When deciding to invest you should find the right broker. ETF platforms like Lyxor, Xtrackers, and Proshares offer an inexpensive, efficient way to trade stocks and other securities.
People use ETF investing platforms because they are all about following trends in the market using just one type of assets rather than trying to predict when specific stock trends will change every day. They also offer a more flexible because instead of having just one trade every day you can have dozens per week without paying significantly higher commissions.
ETF investing through an online brokerage firm is cheaper than buying mutual funds directly from a fund company with a transaction fee. Sometimes, when buying in small increments there are even no transaction fees and no load charges.
ETFs – Overview
ETFs are not that hard to understand. Their investing advantages are several. First, ETFs are cheaper and they offer several investment options. Second, the liquidity of the market is very high because of the high frequency of trades. Third, it is possible to make the trade at any time, regardless of trading hours on your side.