Investing could be a tricky path to walk. From fees to risks, flexibility, returns, yadda yadda yadda! Diversifying your investment portfolio is the #1 tip everyone is gonna give you, but how do you do that exactly? ETFs!
What are they? How do they work? Are they any good? So many questions and we have the answers!
Exchange Traded Funds (ETFs) are funds that trade on stock exchanges. So easy to explain, right?!
They usually track a specific index. That index gives you exposure to many types of securities. In simpler terms, when you invest in ETFs, you’re essentially buying a basket of investment goods; stocks, commodities, and bonds. It’s like a financial care package. You get to dip your toes into several stocks at once without buying them individually.
Good investment? Or…
ETFs are a generally good investment and many find them a more favourable choice than mutual funds because they come with pretty good benefits.
1. Trading: For ETFs, they are traded throughout the day at different prices and you can view ETFs' prices and trade ETFs anytime. But mutual funds are traded once at a fixed price.
2. Costs: ETFs generally have lower fees than mutual funds.
3. Diversity & flexibility: Of course, what makes ETFs attractive is that it diversifies your portfolio in an easier way than buying individual stocks.
4. Minimum investments: ETFs don’t have a minimum investment which means you can buy as much or as little as you like.
All of this sounds good, but we know that no investment is 100% safe. Even ETFs come with a little bit of risk.
1. Market risk: Since ETFs are traded throughout the day like stocks, they are also subject to price fluctuation based on the index it tracks.
2. Tracking errors: Management fees, timing, and other factors may impact the returns of the ETFs. In that case, ETF’s returns won’t be the same as the index it tracks.
3. Florigen exchange risk: Some ETFs invest in foreign markets. But that means that your investment will be subjected to exchange rate fluctuations.
4. Concentration risk: If an ETF is focused on a limited number of sectors for example, it could increase your exposure to risk in that area.
ETFs sound like a good investment overall; however, you should always do your research or consult with a financial advisor when it comes to investing.