When it comes to investing, investment funds and the Actions They tend to monopolize all the attention. But, over the past two decades, there has been another financial product that has been gaining popularity. Best of all: Combine some of the best features of mutual funds and stocks in one investment.
Is called exchange traded fund (exchange-traded fund) either “ETFs» by its acronym in English, for short. From introduction in 1993 With the S&P 500 Trust ETF “SPDR” (or spider, as it is better known), investors have become fond of ETFs for a variety of reasons.
Here’s why ETFs are so great and how you can start investing in them.
What is an ETF?
Like mutual funds, an ETF is a collection of other securities, such as stocks, bonds, etc. The fund provider decides which assets to buy, creates a fund to track their value, and then offers ownership of the fund by selling shares to investors. Since each stock represents several different securities, investors can easily diversify without having to go through the trouble of buying each and every one of them individually.
Like stocks, ETF shares can be bought and sold on the open market. This means that its price can fluctuate throughout the day. Unlike investment funds, whose value is only calculated at the end of the day, after the markets close.
Currently, the ETF sector is valued at more than 6 trillion dollars (USD) and consists of almost 7,000 different funds around the world. In some places in the world (such as Canada), ETFs have come to outsell investment funds.
ETFs vs Mutual Funds
At first glance, you might wonder why anyone would want to buy an ETF instead of a mutual fund.
While it is true that both products share many similarities, some very important differences may influence you to choose one over the other.
Market fluctuation and risk
Since ETFs are constantly traded, their value can fluctuate depending on the ups and downs of the market. This means that sometimes the price of an ETF share may or may not reflect the underlying value of the assets it holds.
As with stocks, this can be good or bad depending on the situation. If you buy the stock at a discount and it rises in price, you will make a profit. But if you are the one who sells the stock at a discount, you risk suffering losses.
Trading Commissions
When you buy and sell ETFs, you pay a commission just like you do with stocks. A commission is a fixed fee that your broker charges you for placing the trade.
Today, most discount brokers charge anywhere from $5 to $30 per trade. Some even offer $0 trading for an introductory period or if you maintain a certain account balance.
Lower expense ratios
In addition to fees, ETFs also have an expense ratio (just like a mutual fund). An expense ratio is a percentage-based annual fee that the fund charges you to maintain its operation. Since many ETFs are simply a variation of an index fund, you can expect the expense ratio to be much lower than what a typical mutual fund charges.
Taxes
Because ETFs trade like stocks, they are generally not subject to taxes until you trade them. Generally, this means that if you held the ETF for less than a year, you will pay a short-term capital gains tax. If you owned the ETF for more than a year, you’ll pay a lower capital gains tax over the long term.
ETFs can be viewed as more tax efficient than mutual funds because they are not constantly rebalancing and reallocating their assets to shareholders.
Any dividends you earn from an ETF will be taxed the same way you would from a mutual fund.
Types of ETFs
Like most financial products, ETFs come in all shapes and sizes. Whatever you like to invest in, there’s likely an ETF that’s right for you.
Here are some of the most popular types of ETFs:
- Stock ETFs– Consists of stocks (usually of companies based in the United States) that replicate major market benchmarks (such as the S&P 500 index).
- Sector ETFs– Focuses on stocks in specific industry sectors (such as technology or pharmaceuticals).
- Foreign Market ETFs– Invest in foreign stocks and benchmarks (e.g. Asia or Europe).
- Bond ETFs– Consists of fixed income assets, such as government and corporate debt.
- Style-Based ETFs– Designed to satisfy certain investment preferences (i.e. those seeking value or growth).
- Commodity ETFs– Invest in regularly used commodities, such as gold and oil.
- Currency ETFs: consists of foreign currency that can be used as a hedge against when the dollar depreciates.
- Real Estate ETFs– Allows you to own various types of real estate through REITs (real estate investment trusts).
- Derivative ETFs– Contains derivative contracts that are frequently sold in connection with stocks, such as futures and options.
How to buy ETFs
Buying an ETF is a relatively simple process. If you’ve ever bought stocks or mutual funds, buying ETFs will basically be a similar process.
If you’re just getting started in investing, here’s what you should do:
1. Set up your brokerage account
Find a reputable discount broker and open an account. Choose a well-known financial company, such as Fidelity or E-Trade.
You can choose to open a regular taxable brokerage account or a tax-advantaged retirement account, such as a traditional or Roth IRA. Since IRAs are used to accumulate retirement savings, taxes on capital gains and dividends are often deferred or even eliminated entirely, depending on the type of account you decide to open.
2. Research your options
After creating your account, the next thing is to examine the different ETFs and choose which ones you would like to invest in.
It’s important to choose an ETF that fits your risk versus reward tolerance. Do you invest to make more money or to grow? Or maybe you’re investing for retirement? If you’re looking for growth, for example, you can choose ETFs that specialize in small-cap or foreign stocks. If you prefer your investments to not fluctuate as much in value, you may want a good US large-cap bond ETF or index fund.
Also be sure to compare the expense ratio of each fund you are considering. Remember: The lower the commissions, the more money for you.
3. Build your portfolio
Once the funds have been chosen, it is time to press the “buy” button. Take a look at your brokerage account to make sure the money from your bank account has been transferred and is available for use.
After purchasing your ETFs, check your investments from time to time and make sure they are performing the way you want. If any of the funds you chose turn out to be a bust, it may be time to re-investigate and switch to other ETFs.
Continue learning about ETFs, learn about the average return of ETFs, and the best ETFs you can buy right now.
This information provided for informational purposes only; It is not intended to be used as accounting, legal or tax advice. Regarding these issues, speak with your accountant, tax or legal advisor.
Investing involves risk that includes loss of capital. This guide contains the current opinions of the author, but not necessarily those of Gigonway. These opinions are subject to change without prior notice. This guide has been distributed for educational purposes only and should not be considered investment advice or a recommendation of any particular security, strategy or investment product. The information contained in this guide has been obtained from sources considered reliable, but is not guaranteed. Gigonway does not provide legal or tax advice. Please consult your tax and/or legal advisor for specific tax or legal questions and concerns.