Advantages of trading ETFs
An ETF(Exchange Traded Fund) is a hybrid of mutual funds and closed-end funds. ETFs hold a basket of different assets
such as stocks, bonds and commodities; they are traded on a market exchange which means that they can be traded
anytime stocks trade. Most ETFs track a specific index and trade very close to their underlying value (net asset value).
The variety is deep and wide, one ETF can give exposure to a group of equities, market segments or styles. By covering all major indices, sectors, industries, sizes, strategies, international and specific countries it will diversify your portfolio instantly.
ETFs trade on a market exchange so they can be traded (intraday) anytime stocks trade. ETFs can adjust in real time, according to demand. So if the demand in an ETF exceeds what is available the ETF issuer can create more units to meet demand.
It enables investors to take positions in alternative and exotic investments that are hard to reach in any other form to small investors.
Traded like stocks
ETFs can be purchased on margin and sold short which allows you to manage risk by trading futures and options just like a stock. You invest in a portfolio of separate companies and are traded at a price that is updated throughout the day.
ETFs are a cost-effective way to gain exposure to a diversified portfolio of securities. They are generally less expensive than actively managed funds and even some index funds. They are usually less costly than purchasing a large number of individual shares, as there are less trading costs.
ETFs are transparent in their objectives – to achieve results in line with their market benchmark. They are also highly transparent in their holdings, with many ETF providers updating this information daily.
In 3 steps
An ETF provider considers the universe of assets, including stocks, bonds, commodities or currencies, and creates a basket of them, with a unique ticker.
Investors can buy a share of that basket, just like buying shares of a company.
Buyers and sellers trade the ETF throughout the day on an exchange, much like a stock.
What are some of the various types available?
ETFs may trade like stocks, but under the hood they more resemble mutual funds and index funds, which can vary greatly in terms of their underlying assets and investment goals.
Bond –can include government bonds, corporate bonds, and state and local bonds. A common use for them is to generate regular cash payments to the investor. These payments come from the interest generated by the individual bonds within the fund. Bond ETFs are generally a lower risk-option.
Industry –track a specific industry such as technology, banking, or the oil and gas sector.
Commodity –is an investment in commodities like crude oil or gold and let you lets you bundle these securities into a single investment.
Currency –invest in foreign currencies such as the US dollar or British pound.
Inverse –attempt to earn gains from stock declines by shorting stocks. Shorting is selling a stock, expecting a decline in value, and repurchasing it at a lower price.
International –Are recommended for building a diverse portfolio. They generally come with lower-risk, and is an easy way to make foreign investments. These can include investments in individual countries or specific blocks of a country.
Stock –investment in stocks and are usually meant for long-term growth. They are typically less risky than single stocks, they are still considered more risky than some of the ETFs.