What Are ETFs - Exchange Traded Funds - banks and money-banksandmoney.com

What Are ETFs – Exchange Traded Funds ?


What Are ETFs – Exchange Traded Funds ?

Exchange Traded Funds (ETFs) are one of the fastest growing segments of the mutual fund industry.

The reason for this is simple. Exchange Traded Funds are designed to take the guesswork out of investing. They are easy-to-understand, low-cost, no-load funds that provide on a daily basis a real-time snapshot of what the entire market is doing.

What makes Exchange Traded Funds different than other types of mutual funds is that they are traded like stocks every day in the New York Stock Exchange (NYSE) and other exchanges.

What this means is that investors can purchase or sell these funds just like they would any stock at any time. This feature gives investors near real-time access to investment opportunities, which may be superior to those offered by most fixed income investments such as bonds and certificates of deposit.

The first ETFs were launched in 1990 by a small group of investors led by Niels P. Andreasen of Norfund. Since then, the popularity of Exchange Traded Funds has grown dramatically.

An Exchange Traded Fund is different from a mutual fund in two important ways. First, an ETF is always invested 100% in the securities tracked by the fund. A mutual fund, on the other hand, will usually invest in a wide variety of stocks, bonds, commodities, etc.

Secondly, an investor who purchases shares in an ETF does not receive voting rights or any other type of involvement in the management of the fund. What makes an ETF especially useful for investors who are uncomfortable with the idea of owning a large number of individual securities is that they can purchase just one share (or fractional shares) of an ETF and indirectly own all of the assets tracked by that fund.

In fact, there are over 2,000 different ETFs available for purchase on US exchanges. These funds were categorized into 27 different sub-sectors by the Financial Industry Regulatory Authority (FINRA). Globally there are approximately 8,000 different ETFs.

Because ETFs are traded like a stock, you can invest through online brokers, discount brokers, or through a full-service broker like Charles Schwab.

The Different Types Of ETFs

The three main types of ETFs are:

Stock ETFs

These track an individual company (like McDonald’s or Procter & Gamble) or a group of companies (like the S&P 500 Index). You can also create your own stock index fund by investing in the specific stocks that make up the index. A good source of info on individual stocks is “The Wall Street Journal Stock Diary.”


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Index Fund ETFs

These track an overall market index, like the S&P 500 or Russell 1000, which represents the largest one thousand U.S. publicly-traded companies.

Sector Index ETFs

These ETFs focus on a particular industry like health care, technology, or finance. Sector indexing can be a useful way to diversify your investments across different areas of the economy.

In addition to sector indexing, you can also get more specific and invest in individual industries like biotech or computer hardware.

Other types of ETFs

Multi-Cap

These funds track the price movement of several different stocks rather than just one. This provides a little more “diversification” (although still not complete) because it eliminates the impact of any one company that may be performing poorly.

On the other hand, this adds more “transaction costs” because you will have to buy and sell several different stocks rather than just one. Multi-cap funds are useful if you don’t plan to actively trade your investments.

International

These are similar to multi-cap funds but they track the prices of stocks from different countries. Like multi-cap funds, international funds add transaction costs but these costs are usually lower than with multi-stock funds. International funds are especially useful for those investors who have a large percentage of their portfolio invested in foreign markets.

Dividend ETFs

A dividend ETF, or “dividend proxy,” is an exchange-traded fund that represents all the stocks in a certain industry that have a high dividend yield. Dividend yields are the dividends divided by the stock prices.   Just like other ETFs, dividend ETFs are very popular because they give people a way to invest in a group of stocks without actually buying each individual stock, plus they have the additional benefit of paying a dividend.  

Volatility ETFs

Volatility Exchange Traded Funds attempt to capitalize on the ups and downs of the market by investing in stocks that are considered to be volatile. 

They do this by using what is called “volatility measurement.” This involves looking at the price movements of certain groups of stocks over short periods of time (like one day, one week or one month) and then comparing these numbers to those of stocks considered to be less volatile. The idea is to invest in the more volatile stocks so you will profit when the overall market is rising but also suffer some decline when the market is falling. Volatility ETFs are NOT suitable for all investors. They are best suited for sophisticated investors who understand the concept of volatility and know how to properly select which areas of the stock market are likely to be most volatile in any given period of time. You should NOT invest in a volatility ETF if you are just getting started with investing or if you are just learning about investment management.

How To Pick The Right Exchange Traded Fund For Your Needs

We’ve learned what an Exchange Traded Fund (ETF) is, how they work and the different types of ETFs. But now it’s time to learn how to actually select the right one for your needs. 

It is best to make an intelligent decision about which type of fund is best for your situation. Remember, no matter which category of fund you select, you must also carefully consider whether or not that particular fund is a good fit for your investment goals and risk profile.

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