ETF or an Exchange Traded Fund is a collection or a basket of stocks, bonds, and other securities that are bought and sold similar to stocks i.e. they are traded on stock exchanges via a stockbroker. An investor can buy many stocks or bonds at once through an ETF and they are considered an easy way to enter the world of investing.
According to Investopedia, ETFs are called an exchange-traded fund since they are traded on an exchange like stocks. ETF prices fluctuate all day, similar to stocks, as they are being bought or sold and their performance depends on the stock prices of underlying securities.
ETFs are provided by specific financial firms also known as ETF providers and they can be a combination of any number of different securities. An ETF can be confined to one sector and industry or can be a combination of thousands of stocks. This unique collection can be bought by investors through traditional or online brokers.
There are several types of ETFs and a bond ETF may include government bonds, municipal bonds, or even corporate bonds. Similarly, stock ETFs comprise of equities and are generally meant for long term growth.
Industry ETFs track a specific industry like technology or banking and similarly commodities ETFs can give you exposure to commodities such as gold or crude oil while currency ETFs invest in foreign currencies.
You are free to choose any ETF you want to invest in accordance with your personal preference. ETFs are popular and a top investment choice because of the wide range of options available.
Benefits of investing in ETFs
According to Nerdwallet, investors choose ETFs because of their simplicity, relative cheapness, and access to a diversified portfolio. They have become very popular solely because of the numerous benefits they reap.
ETFs are somewhat similar to mutual funds but the important points that set each other apart are subtle but essential. When you hold ETFs, you are liable to pay an annual management fee which is known as an expense ratio. This amount or the expense ratio is much lower in ETFs as compared to mutual funds and results in a fair amount of savings over the long-term.
Brokerage on ETF investments is also significantly lower and sometimes even zero. According to MotleyFool, ETFs are more liquid i.e. easier to buy and sell than mutual funds and online brokers make this process easier.
Another major benefit that you receive by investing in an ETF is diversification of the portfolio. Investors should keep in mind that portfolio diversification is very important as it reduces investment risks by a huge margin. ETFs also let you diversify across several industries.
Further, you can hold a number of investment options by only one click, making it apt for someone who does not have the time or expertise to pick individual stocks. Additionally, diversification is important because if one stock faces a down-trend in the market, another stock should keep you covered so you don’t lose all your money. In general, ETFs help to strengthen your portfolio.
You are eligible to receive dividends on your ETF investments on a regular basis which will help the investor benefit from a regular and predictable income stream.You still have to pay taxes on dividends when they are distributed.
The Bullish takeaway
ETFs are a very unique investment option that gives you the flexibility of stocks paired with the diversification provided by mutual funds. All the benefits mentioned above make them an attractive option.