Are you looking for something that is traded as easily as stocks but with all the profits offered by mutual funds? Learn more about what is an ETF in this article!
What is an ETF?
“ETF” is deciphered as an “exchange-traded fund.” What is so special about this fund?
- It is easy to work with – if you had experience with stocks, it is going to be similar;
- Online exchanges are the places to trade ETFs – it only takes a few clicks.
Such funds are unique because they can include a huge number of different assets or a combination of them. Thanks to ETFs, you do not have to sell or purchase assets separately, it can be done all at once.
How does an ETF work?
Now that we have explained to you the ETF meaning, we can have a look at how they work.
Imagine that there is a fund provider that decides to track the performance of many assets by creating a fund. He does that and sells shares of the created “basket” to other people, making them shareholders.
The investors do not own the assets of the basket. The shareholders gain profits from dividends or reinvestments from the stocks that make up the stock index.
More: How to trade ETF — guide for beginners.
Why are ETFs better than mutual funds and stocks
Taxes are a hard topic for owners of mutual funds. ETFs are much more profitable here, and that is what most investors search for.
The charges that have to be paid are much lower. These numbers are our proof:
- 1.42% is the United States equity average mutual fund charge;
- 0.53% is the average equity ETF charge.
Another good thing about ETFs is the tax-efficiency. Also, when investors decide that they want to sell a mutual fund, the manager will have to sell securities to get cash. The catch here is that securities can grow in price and bring higher profits.
If you already know what is an ETF, we recommend you to check out our ETF day trading guide for beginners. It will help you come up with a good starting strategy in a step-by-step way of explanation.
More: ETF Day Trading for Beginners
ETF stocks have two similarities with separate stocks. Both have their ticker symbols and are traded on exchanges. The tickers are quite amusing sometimes. As an example, there is a symbol “HACK” that represents the ticker for a cyber-security fund. However, these are the only similarities because ETFs consist of a group of stocks and other assets, while a separate stock represents only one company.
How to invest in an ETF?
Online brokerage services are the places where you need to look for exchange-traded funds. The usage of a broker will make all the process only a few clicks long for you, meaning that you will not have to fill in a lot of documents and other stuff like that. The number of offers and fees vary from broker to broker.
After reading this article, you definitely know what is an ETF. The information given to you here will assist you in making a choice whether an ETF is good for investing your money or not.
Advantages and Disadvantages of ETFs
First, let us check out the advantages of investing in ETFs.
- Diversification;
- Transparency;
- Tax efficiency.
Now let us see what disadvantages do ETFs have.
- Costs for trading;
- Finding buyers;
- Closure risks.
Best ETFs
We have also prepared a list of 3 best ETFs for 2020. The selection was based on the most important criteria: the best performance per year and the most profitable expense ratio. This will help you make the best choice at the beginning of your career.
- Invesco QQQ Trust (QQQ).
- Vanguard S&P 500 ETF (VOO).
- ProShares VIX Short-Term Futures ETF (VIXY).
You already know what is an ETF fund, so keep these listed exchange-traded funds in mind when you decide where to invest your money.