An Exchange Traded Fund, or ETF, tracks a number of assets (collections of stocks, bonds, or commodities) on the stock market. ETFs can be traded on the stock market like any other stock and their prices fluctuate as a result. ETFs come in many different forms.
Who should use ETFs?
Anyone who wants to specialize their investments in a certain way.
ETFs are useful because they help you specialize your investments without too much effort. There are thousands of ETFs available that cover every conceivable strategy and approach for an investor. This means that if you want to specialize in a particular sector, industry, or style of investing, you can find an ETF to meet those needs.
How do ETFs help you meet your financial goals?
ETFs allow you to pick and choose particular styles of investing or to focus on specific parts of the market. One type of ETF could focus on the US healthcare sector, while another might invest in global emerging markets or less popular businesses.
ETFs save you time and effort when you’re looking for particular types of investment. If you wanted to get into value investing but don’t want to go to the trouble of finding individual stocks, there’s an ETF that can do that for you.
Specialized ETFs aren’t for everyone, but if you don’t mind a little more risk in your portfolio, ETFs are a good way to potentially earn a little more.
How long should you keep an ETF?
You should review the performance of your ETFs on a regular basis to check that they’re performing as you want them to. Checking their performance on a yearly basis against the market as a whole and also against other ETFs is worth doing. You can then choose to reinvest elsewhere if you’re not getting the returns you want.
What are your expected returns?
- ETFs vary significantly in performance, depending on the type of ETF you’re investing in.
- Many ETFs also pay interim returns, through dividends or other payments.
What are the benefits of ETFs?
- Specialized but still diversified – Although specialized ETFs are less diversified than index trackers, they’re still more diversified (and hence less risky) than holding stocks in individual companies.
- Low fees – ETFs typically have low fees. Over 95% of ETFs charge fees of less than 1% a year; however, some ETFs do have higher fees, so always check.
- Long-term growth – You can expect your ETFs to increase in value over the long term.
- Interim payments – Most ETFs pay dividends or other returns on a regular basis.
- Tax benefits – Because of the way they pay gains, ETFs can be tax advantageous.
What are the drawbacks of ETFs?
You need a brokerage account – ETFs can generally only be purchased via a brokerage account.
Magnified gains and losses – Because ETFs tend to specialize in particular areas, your gains and losses can be magnified. Economic factors and news that impact a particular sector are likely to affect most of the stocks or other assets in that sector, and hence the value of the ETF.
Be careful of leveraged ETFs – Some types of ETF are “leveraged,” which means that they gain or lose in value more quickly than the assets that they track; for example, an ETF might be leveraged against the S&P 500 at a ratio of 3:1 – this means that for every point the S&P 500 gains or loses, the leveraged ETF gains or loses 3 points. It’s a fast way to gain and lose money, and leveraged ETFs are best left to the professionals.
Be careful of inverse ETFs – Some types of ETF are “inverse,” meaning that as the assets they track increase, the ETF decreases, and vice versa. This is not recommended for novice investors.
You might not be diversified enough – Although ETFs are somewhat diversified, that diversification is limited to the areas the ETF invests in. This means that you should still diversify your investments in other ways.
You should not invest in an ETF over the short term as you could lose money. Like any stock market investment, ETFs can be volatile on a day-to-day, week-to-week, and month-to-month basis.
How do you invest in ETFs?
You can buy directly into ETFs via your online broker account.