ETFs: The Easy Way to Invest

ETFs: The Easy Way to Invest

Do you want to invest without the risk of picking individual stocks? ETFs provide a great way to do this. They provide a low-cost way to diversify your investments while offering more consistent returns and less risk compared to picking individual stocks.

What are ETFs?

ETFs are types of baskets containing a set of specific investments to either beat or track the performance of an index. ETF stands for exchange-traded fund and it is a basket that holds many different types of securities such as stocks, bonds, commodities, or a mix, which aim to track or beat the performance of an index. They can use different strategies and invest in many sectors.

Example

One example of an ETF is SPDR S&P 500 (SPY) which tracks the performance of the S&P 500 index. Just like stocks, the price of an ETF changes throughout the day as it is bought or sold. This is different from a mutual fund which only trades once per day after the market closes. ETFs also come with lower expenses as compared to buying individual stocks. ETFs are very beneficial as they provide an easy way to diversify, less volatility, less risk, and are more liquid than mutual funds. When an investment is liquid this means it is easy to sell the position and collect your money.

There are many types of ETFs aimed at different goals, sectors, and industries. Some are more focused on U.S. holdings and others are focused globally. ETFs may be used for income generation, speculation, capital gains, and to hedge or provide some protection in an investment portfolio.

There are passively managed and actively managed ETFs. Passively managed ETFs aim to mimic an index while actively managed ETFs aim to outperform an index by using a portfolio manager, which leads to higher fees. The portfolio manager oversees actively buying and selling shares of companies to meet certain goals. When investing in an ETF it is important to consider whether paying high fees will be worth it in the end. If an ETF earns 7% average annual return and has a fee of .09% and you invest $1,000 annually, you will pay $1,800 in fees over 30 years and your investment will now be worth $99,000. If an ETF earns 7% average annual return and has a fee of .82% and you invest $1,000 annually, you will pay $15,000 in fees over 30 years and your investment will be worth $86,000.

ETFs offer an easier way to invest compared to buying individual stocks. You will not have to worry about a stock performing poorly because an ETF already contains many stocks. If some stocks held by the ETF perform poorly, the others can make up for it by having a better performance. For one price you gain exposure to hundreds of stocks.

Another good example is VGT or Vanguard Information Technology ETF. This fund invests in the stocks of companies that operate in the information technology sectors. The top 3 holdings include Apple, Microsoft, and Nvidia. The total number of holdings is 341. ETFs are great if you like to set it and forget it. You can also set up automatic investments so you don't even have to think about it.

Compare and discover ETFs here: etfdb.com

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