How To Invest In Exchange-Traded Funds (ETFs) And What You Need To Know About Them
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Are you looking for more ways to earn money passively? Check out ETFs or Exchange-traded funds, as these are one of the best ways to get started in the stock market. It doesn’t matter if you’re a veteran trader or if this is your first rodeo, ETFs provide you with average returns through a well diversified portfolio at a low cost. Best of all, unlike most mutual funds, you can buy ETFs through almost any online brokerage app. From trading platforms for beginners like Acorns and Public to ones for more advanced investors like M1 Finance, 99% of today’s online brokers have ETF options for you. And today we hope to teach you everything you need to know how to invest in ETF funds.
What Is An Exchange-Traded Fund?
ETF works just like stocks. They are traded on various exchange platforms throughout the world. Just like stocks, its buying and selling price can change depending on the trading activity for the day. Compared to mutual funds, ETF has more liquidity and are relatively cheaper, considering its prospective gains.
ETF are generally cheap and have lower risk profiles than stocks because a single fund would be diversified across a large investment portfolio. ETFs hold multiple underlying assets, unlike stocks that have a 1:1 ratio on assets. The ETF is also a good option for traders who want to diversify their investments.
The ETF can hold numerous stocks in many different industries, or it may also be focused on one industry only. There are some funds that are for U.S. industries only, and there are some that can be spread across global markets, such as banking-specific ETFs that can hold stocks of banks globally.
Types of Exchange-Traded Fund
Investors may also take advantage of various types of ETFs so they can get the most out of their investments. Here are some of the different types of ETFs:
- Bond ETF– this includes government, corporate and municipal bonds
- Industry ETF– you can choose to put your ETF on a specific industry or sectors such as technology, energy, or banking.
- Commodity ETF, for commodities such as precious metals and natural gas.
- Currency ETF, this is where different currencies such as U.S. dollars or Japanese Yen can be invested upon using the ETF.
- Inverse ETF, used for earning gains from a bad stock performance by shorting. Shorting a stock is the process of selling or dumping stock, letting its value decline, then buying the same stock at a lower price.
How to Buy An Exchange-Traded Fund
Open A Brokerage Account
Find and Compare ETFs
The next step after opening a brokerage account is to choose which ETFs to buy. Here are some of the things to consider to help you in making your ETF choices.
- Administrative expense- This is also called as expense ratios. Choose an ETF provider with low administrative expense because this expense would reduce your profit. According to a report by Morningstar, the average expense ratio was 0.15% in 2018, but do not hesitate to look for ones with a lower ratio
- Commissions- also known as transaction fees, but luckily, these commissions can be considered as extinct because most online brokers do not charge any fees whenever you buy or sell an ETF.
- Volume- you need to check how many shares have been traded on an ETF before getting, this would give you a sense of how in-demand the fund is and could give you a glimpse of what its value would be in the future.
- Holdings- consider also which companies or profiles the fund invests in before getting the ETF. This is to assure you that the ETF is on a good track, and will not crash anytime soon or at least before you withdraw it on your desired time.
- Performance- even though past performance does not necessarily dictate a product’s future, it is still useful information, especially for risk-averse investors.
- Trading prices- another important consideration is to know the price before buying or selling an ETF because you might not get what you paid for the ETF if you disregard this.
Place Your Trade
The next step is to trade your ETF as you see fit, this would mean buying or selling your ETF for cash or another ETF. Most brokerage websites and trading platforms have a “Trading” section and generally, the interface is user-friendly and functions in the section are straightforward.
An Alternative Way to Invest in ETF
Another option is to use Robo-advisors, like Acorns, to do all the work for you, the Robo-advisor can build and manage an investment portfolio for you, and they basically invest on your behalf! The only disadvantage of this is that Robo-advisors only offer curated investment portfolios, and you may not be able to invest in many other ETF types.
Now is the Best Time!
Since everyone’s still in the middle of the pandemic, businesses are still coping and trying to recover. Therefore, most equities still have more room to run. That said, there is no bad time to start investing. Markets go up and markets go down. Invest consistently and in the long term you will win. In fact, we think these times are the best times to invest in ETFs, especially if you are planning to stay in the market for at least three years.
We’re of the opinion that you should always invest in stocks and ETFs that you will never want to sell (unless you have to). Give them time to compound and great things will happen.
At the end of the day, all ETF investment decisions are yours to make, and just like any other investment instruments, there are also risks attached to an ETF no matter how low it is. Be sure to consider these risks and plan ahead before investing in an ETF.