What Is An ETF And How To Invest In It (Infographic)
ETFs are really popular financial instrument nowadays. But what is an ETF and what’s the big deal investing in such? ETF is an abbreviation from Exchange Traded Funds and actually is an investment company, that collects money by selling shares to the broad public and invests the collected money in different assets like shares of other public companies, commodities, and all other kinds of assets. This way people, who have shares in such a fund get their money managed professionally and without their participation. They are just like mutual funds, except that they are traded on a regulated stock exchanges, like The New York Stock Exchange. Each ETF tracks/invests a certain asset or a group of assets, this makes these funds instruments for investing in these assets.
There are different types of ETFs. Some of them track a stock index like SP500 or Dow 30 index. These funds buy all the components (stocks) of the index, in the same proportion in which they are used to calculate its value. This is how you get a fund that changes in price just like the index. As you may know, you can’t directly invest in SP 500, but a good way to do that is by buying share of and ETF fund, that tracks it. Because of the fact that ETFs are passively managed, their performance depends on the performance of the assets they follow, not on the performance of the management. This actually minimizes the risk of choosing poorly managed fund.
ETFs may follow any other asset or security. For example there are commodity ETFs investing in gold, copper and other metals; there are such funds buying bonds, estates, and other assets. Currently, a bitcoin ETF is opening, that will allow people to invest in the innovative crypto currency. The site www.etf.com is a place, where you can find a big collection of different types of such funds, read detailed information about each of them and get a better idea what they are. It’s a really nice ETF screener.
What’s The Big Deal Investing In An ETF?
So, what’s the deal? These funds have some big advantages like:
* Your money are managed by highly skilled professionals – if you don’t know much about investing, this might be a good reason for you to invest in such a fund.
* Low investment expenses – ETFs are managed passively. This means that their managers buy something and just hold it. No active trading is involved. This way the amount of fees paid by the fund are minimized. The yearly expenses of an ETF are around 0.55% of the assets, while the average expenses of a mutual fund are more than double, around 1.23% (numbers are based on a research made by Morningstar). Some index funds have annual expenses from as low as 0.2% of the assets, which is cool.
* You can invest in assets unavailable for direct investing – for example you want to invest in stocks from Africa. How do you do this? You have to research well all brokers that offer African shares, you should get familiar with the business climate in Africa, you should make a thorough research of the companies and so on… In a few words you have to do a lot of work and if you are not very well with financials and economics it will be a pain in the butt for you. A really simpler alternative for you is to buy ETF shares of a fund that invests in a Africa and save all the struggle. Or imagine that you want to heavily invest in gold… You can’t keep 20 kilos of the precious metal at home, can you?
* You can save taxes – you pay taxes only for the profits you realize, when you sell your ETF shares. This way you can literally avoid taxing your profits forever, or decide when is the best moment you want to pay em.
What Are ETFs? Infographic
We hope this article gave you a basic idea about what these funds are and how they work. Don’t miss checking out some more of our cool posts on investing. Don’t be ashamed to share some with friends on your favorite social site. Thanks!