Trying to meet the demand for newer products, Wall Street always comes up with new ways for anyone to invest. One of their latest creations is the ETF. The ETF is similar to a mutual fund in that it draws on a basket of different investments to produce the final product. Those who have their money working in an ETF will not have to fear one single stock as the downfall of their entire portfolio. Instead, they will enjoy the diversity provided by owning tiny pieces of many different investments.
AN ETF In-Depth
For new or inexperienced investors, “What is an ETF?” is a perfectly valid question to ask. ETFs are relatively new, having just been introduced in 1993. ETF is short for Exchange-Traded Fund. A fund manager buys thousands of stocks in a particular category. For example, an ETF might be comprised of shares of stock in the S&P 500. This large fund is then sold in pieces to individual investors at prices that are much more comparable to stock than other funds. In effect, investors who purchase an ETF are purchasing fractions of hundreds of different stocks, keeping diversification high in most cases without having to invest large sums of money. An ETF is a desirable investment vehicle for several reasons.
One of the biggest benefits of buying an ETF is that it posses some of the most desirable characteristics from anindex fund. An ETF allows for the high level of diversification allowed by the investments in index funds. As in an index fund, an investor can buy into a diversified ETF instead of being tied to one particular company. The level of diversification is totally up to the investor, as an ETF may be based on virtually anything. While an ETF such as the Diamond represents the Dow Jones Industrial Average, others are designed to mirror the movements of particular industries. This way, if an investor wants to put his or her money into a particular industry, they do not need to buy individual stocks of a lot of different companies. They can instead buy an ETF that is based on that industry. This also has the benefit of being less costly than buying individual stocks.ETFs also borrow a lot of the best characteristics of buying and selling stocks. An ETF doesn’t have the same restrictions in buying and selling as an index fund. With regard to buying and selling, an ETF functions much more like a stock. Like stock, an ETF can be bought and sold throughout the day, allowing investors the chance to capitalize on fluctuating prices. This ability introduces another desirable element of individual stocks to the ETF, and that’s the ability to sell short or place limit orders. Because of this functionality, an ETF may be an appealing option to someone who wants to invest in the short-term as well as the long-term.ETFs are just one of many options for investors to consider. They do have their downside. Despite this, their hybrid nature of low cost and low volatility makes them an option worth consider. Hopefully, after reading this, questions like “What is an ETF?” can be laid to rest.
