This is a brief guide to ETF for beginners.
Summary
What is an ETF?
Why invest in Exchange-Traded Funds?
Where can I find information about an ETF?
Some of the most famous ETFs
How can I buy an ETF?
Conclusions
What is an ETF?
An ETF (Exchange-Traded Fund) is a basket of securities (with a mix of different assets, including stocks, bonds, commodities, real estate, etc.) that you can buy or sell through a brokerage firm on a stock exchange, like the NYSE (New York Stock Exchange).
The idea behind ETFs is to track an index from any financial sector.Why invest in Exchange-Traded Funds?
There are many reasons:Trading flexibility
They trade like stocks, this fact lets you move your money between specific asset classes, like stocks, bonds, or commodities, and let you trade them anytime during market hours. Instead, traditional financial assets like mutual fund shares are traded only once per day after the markets close.
Portfolio diversification
Exchange-Traded Funds give you a simple way to diversify your portfolio because they cover most major asset classes and sectors, national and international. This gives you better risk management.
Management fees, administrative expenses, etc., are lower than traditional funds. It happens because ETF management simply tracks an index, instead, Hedge Fund management actively operates on markets to obtain better performances. This is one of the essential differences between ETFs and Hedge Funds.
ETFs hold the same securities as the specific index or benchmark they track, and they disclose their holdings periodically (several on daily basis).
Some ETFs distribute the dividends, while others accumulate them.
If an Exchange-Traded Fund buys stocks to track an index, it can receive dividends from these stocks; therefore, they represent an additional flow of money.
This kind of ETF is my favorite.
Some countries (like the U.S.A.) give tax advantages to ETFs compared to traditional funds.
Where can I find information about an ETF?
There are a lot of sites on the internet specializing in these pieces of information (like https://www.justetf.com/en/, for example).
First of all, you must find the document called “PROSPECTUS” or the document called “KIID” (Key Investor Information Document, it’s the document required by the European directive UCITS IV).Some of the most famous ETFs
Surely you have heard of SPY (SPDR S&P 500 ETF Trust), QQQ (Invesco QQQ Trust), and IWM (iShares Russell 2000 ETF, by BlackRock); they track S&P 500, NASDAQ, and Russel 2000 indices, respectively.
Image of the graph of Invesco QQQ Trust (Screenshot by Author - Source: TradingView).
We can use the same platform to study stocks and ETFs.
TLT (iShares 20+ Year Treasury Bond ETF, by BlackRock) is another famous ETF that seeks to track the investment results of an index composed of U.S. Treasury bonds with remaining maturities greater than twenty years.
How can I buy an ETF?
Usually, there are two possibilities (it depends on the country you live in):
- via home banking;
- via a brokerage account.
It’s the same procedure that you use to buy stock.
Conclusions
Takeaways- There are many good reasons to invest in Exchange-Traded Funds: trading flexibility, portfolio diversification, low cost, transparency, dividends, etc.
- Study ETFs and investigate on the internet to find all the information you need about the single ETF that you want to buy or the portfolio of ETFs that you want to build.
A sincere wish of good work to all!
Written by F. GRAMOLA (*).
(*) Member of S.I.A.T., the Italian Society of Technical Analysis (member society of I.F.T.A. – International Federation of Technical Analysts).
Warning
We merely cite our personal opinions for educational purposes only.
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Investing and trading are risky. Don't invest or trade money that you cannot afford to lose.
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