What You Should Know About ETFs (Exchange Traded Funds)
If you’ve got limited knowledge of the stock market, ETFs may just be the right choice for you. Exchange Traded Funds combine many people’s financial resources and utilize it to buy several tradable monetary assets like shares, debt securities, derivatives, and bonds. Unlike mutual funds, ETFs are listed on exchanges and trade all day long, similar to regular stock.
How do they work?
ETFs can be traded like shares through the production of creation blocks on the stock market. First, an ETF provider will consider the pool of assets available which includes bonds, currencies, commodities, or stocks that have a special ticker.
Buying a share of the basket is possible by investors just as company shares can be bought. Then, similar to a stock, buyers and sellers trade the ETF on the exchange all day long through online brokers or conventional broker dealers.
Any price changes are dependent on the cost of underlying assets in the resource pool. If even 1 asset’s price increases, so does the ETFs share price. The dividend value shareholders will receive depends on the management and performance of assets. ETFs may either be actively managed by a portfolio manager or passively managed by following particular market indices trends.
Types of ETFs
There are many types of ETFs like:
- Stock ETFs
Stock ETFs are for long term growth and are less risky when compared to individual stocks.
- Commodity ETFs
These are for goods like crude oil, gold, and coffee, with securities being bundled as a single investment.
- Industry ETFs
Industry ETFs offer ways to invest in companies from particular industries or sectors like the financial or healthcare sector.
- Bond ETFs
Such ETFs can be for corporate bonds, government bonds, or even municipal bonds and are used by investors for the generation of regular cash payments.
- International ETFs
Investments in foreign countries, or country-specific blocks fall under international ETFs.
- Inverse ETFs
These can be used to make gains from stock declines by shorting stocks whereby a stock is sold, expecting its value to decline and then bought again at a lower price.
Benefits of ETFs
ETFs offer several advantages such as:
- Diversification of portfolio
Investors can benefit from portfolio diversification across market verticals and horizontals such as various industries.
- Higher transparency
Anyone can view ETFs price activity on an exchange which makes it a more transparent process. The public also has access to funds holdings details daily whereas this happens on a monthly or quarterly basis for mutual funds.
- Flexibility in trading
Unlike mutual funds which are traded just once a day after market closure, ETFs can be easily traded throughout the day, offering investors greater flexibility to make decisions.
- Tax benefits
Investors are taxed for ETFs only when they sell their investment, unlike mutual funds taxed over the entire investment course.
- Lower costs
ETFs’ operating expenses are also lower compared to mutual funds, making them an attractive option for investors.