Trying to Invest? What are ETFs?
Updated: Aug 29, 2021
Okay, on this beautiful Sunday we are going to delve into ETFs! I know you probably have never heard of that before but if you are interested in stock trading and the market, keep on reading!
Exchange Traded Funds (ETFs) are a group of securities that trade on a stock exchange. It usually tracks a particular index, bond, or commodity. It’s an easy way to invest in a bundle of securities as opposed to individually selecting them. These types of securities are also great because it provides the diversification you may be looking for when investing in a portfolio. So, if a particular stock is not performing well, you have the performance of the other securities which could offset that loss.
ETFS are a lot similar to mutual funds but are bought and sold throughout the day, just like a stock. It’s also cheaper. The price you would pay to buy every single security in an ETF vs. the money you spend investing in the ETF will make a big difference. I am going to briefly touch on four of the many types of ETFs, with Market ETFs being the most common.
Market ETFs: These funds attempt to track a specific index such as NASDAQ or the S&P 500 index.
Bond ETFs: This type exclusively invests in bonds such as U.S. Treasury Bonds, Corporate Bonds, Municipal Bonds, and High-Yield Bonds. I will talk more about bonds in a future post but usually when you invest in bonds, you will receive regular coupon payments every six months. So, since ETFs are comprised of multiple bonds, you will receive coupon payments at different times because of the varying maturity dates. So, interest is paid each month based on the value of the coupons in the basket.
Sector ETFs: This type tracks a specific industry or sector such as energy, industrials, utilities, real estate, etc. This way, you are able to invest in an entire industry of stocks. A lot of times these are used for speculation and hedging purposes.
Commodity ETFs: These funds track commodities or raw materials such as gold, corn, and oil. A drawback with this type, as with any investment in commodities, is that they are often volatile and can be riskier to invest in.
Some other types of ETFs are Foreign Market, Exchange-traded notes, Inverse ETFs, and Style ETFs. These types get more complicated. Some of the most popular ETFs are SPY, which tracks the S&P 500, and VWO, which are comprised of large cap stocks in different markets such as China and India. iShares is also very popular when it comes to investing in ETFs.
If you have any questions about ETFs or would like me to explain further, feel free to comment on this post. Don’t forget to like and subscribe my dears! Peace 😊