An exchange-traded fund—or ETF, for short—is an investment fund that trades on a public stock exchange just like a stock. But unlike individual stocks, ETFs hold dozens and even hundreds of stocks, commodities or bonds, so you get the safety of diversification. In that way, they’re like mutual funds.
Because they are “unmanaged,” however—you might say they run on autopilot—ETFs entail lower annual fees than comparable index-based mutual funds, and far lower fees than actively managed mutual funds.
And unlike mutual funds, which are priced once a day after the market closes, ETFs are traded throughout the day just like regular stocks, so you can buy or sell them whenever you want, and when you buy, you get exactly the price quoted.
What is an ETF worth in the long term?
Even if you are a stock picker at heart, there are some instances when investing in ETFs makes sense—whether it be gaining maximum exposure to a red-hot sector, gaining access to an entire country’s stock market, or simply taking advantage of a bull market.
In general, we don’t recommend buying and holding ETFs the way you would a stock with long-term growth potential. But there’s money to made in ETFs if you time it right.
What is an ETF benefit?
One of the most important factors about ETFs is that they give you access to many different types of investments. ETFs can be comprised of stocks, bonds, commodities, or other assets. This leads to the investor having to pay fewer commissions to brokers since they do not have to purchase each security individually. The variety of these assets also helps to stabilize and diversify an investor’s portfolio.
What is an ETF risk?
Anyone who was investing in stocks in 2008 can probably remember the deepening feeling in the pit of their stomach as the market continued the free-fall that began in earnest in January 2008 and would continue through March 2009. During that time, the S&P 500 Index fell from its October 2007 high of 1,576 to a low of 667 in March 2009. That’s a total decline of nearly 58% in the most popular broad market index in the U.S., and the most popular target for index investors who bought into the “buy and hold” philosophy. If you were holding index ETFs, you really suffered.
There is large risk in putting all of your eggs into the index fund basket. Yes, it’s convenient. Yes, it will provide gains over time if you are lucky enough to retire at the right time. However, the portfolios of today’s retirees will never fully recover from the twin blows of the bursting of the Tech Bubble and the Housing Bubble.
How can you avoid ETF investing risks?
Diversification not only makes you a more well rounded investor, but it also adds a lot of security to your portfolio. The multitude of assets you possess reduces risk because if one asset produced negative returns, you would at least have other investments to fall back on.
Do you understand what an ETF is now? What else would you like to know?