If you are looking into investing, then the best type of investment you can opt for is an Exchange-traded fund or ETF. ETFs are beginner-level investing, which is very easy to learn, and the returns are great without much cost.
But if you don’t have much idea about ETFs, how it works, and how to invest in them, keep on scrolling.
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What Are Exchange Traded Funds?
ETFs are a type of investment that acts like a pooled security investment that is very similar to mutual funds. But unlike mutual funds, ETFs track certain commodities, indices, or sectors. Just like any other regular stock, ETFs can also be sold and bought on any stock exchange.
The first ever ETF was SPDR S&P 200 ETF(SPY). This ETF is still active and tracks S&P 500 Index.
Exchange Traded Funds VS Mutual Funds
It is a very common question among people whether mutual funds and exchange traded funds are the same things.
| Exchange Traded Funds | Mutual Funds |
| For ETFs, you can buy many bonds and stocks in the market at once. | For mutual funds, you can pool your money along with other investors and buy in diverse portfolios. |
| Like any other stock, ETFs are sold and bought in the stock market. | Mutual funds are not sold in stock markets; they are bought from companies offering shares. |
| Whenever the stock market, you can buy ETFs. The prices of these keep fluctuating. | The price of mutual funds is based on their net value and is priced once a day. |
What Are The Types Of Exchange-Traded Funds?
There are many different types of ETFs that are available for investors. You can buy any of them for income generation, price increases, and even speculations. So here are a few types of exchange traded funds you should know about before investing.
Active And Passive ETFs
Exchange traded funds are mainly categorized on the basis of their management, whether active or passive. In the case of Passive ETFs objective, they usually replicate the results on a broader index.
While in the case of Active ETFs, the aim is not to target the security index but to have a manager for their portfolio. Then they can decide on the security that should be included.
Bond ETFs
Through Bonds ETFs, you are able to get a steady regular income. The income that is generated through this investment depends upon the performance of the underlying bonds.
This type of investment includes corporate bonds, government bonds, and local and state bonds. These are also called municipal bonds. These type of ETFs doesn’t actually have any maturity date.
Stock ETFs
A stock ETF usually comprises a box of different stocks to track a particular sector or even industry. The aim or objective of this ETF is to provide a more diversifying exposure to a particular sector or industry.
Sector/Industry ETFs
When talking about Sector or Industry ETFs, you should know that it focuses on a particular industry or sector. The main objective of sector ETFs is to gain more exposure to the benefits of that industry by tracking its performance on the companies of that particular sector.
Commodity ETFs
As easily understood by the name, commodity ETFs primarily invest s on commodities such as gold and even crude oil. One of the benefits of commodity ETFs is that it is able to support the stock market during a slump.
How To Invest In Exchange Traded Funds?
For beginners, it might seem like the stock market is a complicated maze from which you can’t get out. So if you are inclined towards investing in exchange traded funds, then follow the steps given below.
Find A Platform To Invest
By choosing a platform, I mean to say, you need to decide the mode you are going to invest in ETFs. There are both online and offline modes through which you can invest in ETFs.
There are retirement account providers and even apps that let you invest, such as Robinhood. If you opt to trade through these websites or platforms, they are mostly commission free.
Research On ETFs
One of the most important things you need to do, is thorough research on ETFs. There are a lot of different types of ETFs present in the market; you need to understand the one you wanna invest in.
For any type of investment, research is the most important factor. ETFs are different from bonds and stocks, so you have to read up on everything, including the sectors.
Select A Time Of Investment
It is important that you choose a time frame for when you are going to invest in ETFs.
Clear Your Objective
There are mainly two main objects why people invest in ETFs, and they are for growth and to generate an income. You need to decide what is your objective for investing in ETFs.
What Is The Sector Of Your Choice?
As I have stated before, there are many different types of ETFs present in different sectors or industries. Before you start trading, you need to decide the industry or sector you wanna focus on.
What Will Be Your Trading Strategy?
When you are investing in the stock market, it’s best to have a strategy in mind. But since you are a beginner, you might not know what strategy would work the best.
So, in that case, spreading your investment costs out over a longer time period or maybe a dollar-cost average strategy would work great.
Frequently Asked Questions (FAQs) :
To know more about the workings of exchange traded funds, here are some of the questions asked by others.
Like any other stock, you can buy and sell ETFs throughout a trading day, which is not the case for mutual funds. Most of the ETFs charge way lower yearly expenses than most mutual funds.
To invest in ETFs, you don’t exactly need hundreds and thousands of dollars. You just need to pay the money to cover the cost of any 1 share.
These prices can range from only $50 to even thousands of dollars. But you have to remember that you have to buy a full ETF; you can’t buy half.
Since ETFs are bought and sold in the stock market like any other share. You can sell your ETFs any time of the trading day, at any price, or close to their net asset value.
Wrapping Up!
Investing in ETFs is easily learned and is a beginner level investment. So if you are willing to know the tips and tricks of investing in ETFs, then go through this article.
It should be remembered that any investment should be made with proper caution and thorough search. With first time investors, it is always better to start small and learn the trade first.
Hopefully, this article was helpful in making you understand the ways around an Exchange Traded Fund.
Read More:
What Is Global Funds? How To Invest In It?
