What is Exchange-Traded Fund (ETF)

Thanks for sharing!

Exchange-traded funds, ETFs, are a type of investment that offers diversification more than individual stocks.

For example, if you don’t know what to invest in, an ETF is your best choice. However, there are many ETFs in the stock market.

 In this post, you’ll learn the pros and cons of ETFs.

Exchange Traded Fund (ETF) Definition

ETF is a basket of securities that you can buy or sell through a brokerage firm on a stock exchange. You can buy and sell like a company stock during the day when the stock exchanges are open. Just like a stock, an ETF has a ticker symbol, but the number of shares outstanding of an ETF can change daily.

Please note that If you want to invest in stocks, options, ETFs, mutual funds, CDs, IPOs, and precious metals, you’ll first need a brokerage account. I have a Fidelity brokerage account for my investing.

Pros and Cons of ETFs

Pros

#1 Diversification

ETFs allow you to invest in a variety of companies. That brings you diversified investment with less risk than investing in the stocks of individual companies.

#2 Transparency

ETFs are managed and linked to the movements of the index, so it is easy to understand the price movements. In addition, a fund’s holdings are disclosed each day to the public. Everyone is allowed to see what companies are included in ETFs.

Cons

#1 Costs

Holding ETF is not free. There will be an expense ratio and commission fees. Many brokers have decided to drop their ETF commissions to zero, but it’s always good to have research about expense ratio and commission fees before buying ETFs.

#2 Risk the ETF will Close

If the ETF is not popular, it may be closed.

Here is the characteristic of unpopular ETFs:

  • Too narrowly-focused
  • Too complex
  • Poor return on investment

Brokers create ETFs to collect money from investors, but if the ETFs are not popular and can’t collect money, having the ETFs will be pointless to them. In this case, they’ll close the fund. Shareholders typically receive notification of the liquidation between a week and a month before it occurs.

Types of ETFs

Here are major types of ETFs:

  • Market ETFs: Designed to track a particular index like the S&P 500 or NASDAQ.
  • Bond ETFs: Designed to provide exposure to virtually every type of bond available like US Treasury, corporate, municipal, international, high-yield, and several more.
  • Sector and industry ETFs: Designed to provide exposure to a particular industry, such as oil, pharmaceuticals, or high technology.
  • Commodity ETFs: Designed to track the price of a commodity, such as gold, oil, or corn.
  • Style ETFs: Designed to track an investment style or market capitalization focus, such as large-cap value or small-cap growth.
  • Foreign market ETFs: Designed to track non-US markets, such as Japan’s Nikkei Index or Hong Kong’s Hang Seng index.
  • Inverse ETFs: Designed to profit from a decline in the underlying market or index.
  • Actively managed ETFs: Designed to outperform an index, unlike most ETFs, which are designed to track an index.
  • Exchange-traded notes (ETNs): In essence, debt securities backed by the creditworthiness of the issuing bank, which were created to provide access to illiquid markets; they have the added benefit of generating virtually no short-term capital gains taxes.
  • Alternative investment ETFs: Innovative structures, such as ETFs that allow investors to trade volatility or gain exposure to a particular investment strategy, such as currency carry or covered call writing.

Best ETFs to Buy for 2022

According to U.S News, these are the best ETFs to buy for 2022:

  1. SPDR S&P 500 ETF Trust (ticker: SPY) This fund is benchmarked to the popular S&P list of 500 of the largest corporations in America.
  2. Invesco QQQ ETF (QQQ) This fund is benchmarked to the top 100 firms listed on the technology-focused Nasdaq exchange and excludes those listed on the more traditional NYSE.
  3. Vanguard Total Stock Market ETF (VTI) This fund is benchmarked to a nearly complete list of domestic corporations with more than 3,500 total positions at present. If you want to invest in the whole American company, buy VTI.
  4. Vanguard Russell 2000 ETF (VTWO) Large U.S. stocks are important to hold but don’t forget about smaller stocks. This fund offers exposure to small and mid-size companies that could benefit faster and more dramatically than larger and more mature corporations.
  5. Vanguard Long-Term Corporate Bond ETF (VCLT) This fund is invested in long-dated corporate bonds, with a focus on only “investment grade” bonds from well-capitalized companies.

If you don’t know what to buy, understanding the business cycle may be helpful to you. If you don’t have time for investing, just follow Bogleheads Investment Philosophy.

Wrapping Up

Once you’ve determined your investment goals, ETFs can be used to diversify your risk. I personally like VTI. How about you? What are your favorite ETFs?

Workbook: Personal Finance Tips Every Freelancer Should Know

Get a FREE workbook including a monthly budget sheet + tax preparation cheat sheet for freelancers. 

Invalid email address
No spam. Unsubscribe at any time.