Exchange Traded Funds or more commonly known as ETFs has become a popular way to invest in the stock market over the recent years.
What is ETF?
ETF is an instrument that enables investors to buy and sell anytime during trading hours on the market. It comes in many forms. Meaning, an ETF can be made up of select stocks, tracking an entire index, or a specific theme such as Sustainable Energy or Information Technology.
Risk Profile of ETF
There are many ETFs that cover the same set of stocks but that does not mean that these ETFs are exactly the same. For instance, one ETF may apply an equally weighted portfolio of its stock holdings whereas another with same stock holding has a high allocation towards 5 stocks with remaining stocks making up only a small part.
It is always a good idea to research the ETF on the official website of the ETF provider so that you can understand what stocks are being held and their allocation.
Themes
It is possible to invest in a number of themes ranging from climate to technology trends. Themes vary for each provider so the best approach is to browse as many providers as possible to find the theme that fits your strategy.
Indices
Thanks to ETFs it has been much easier to gain exposure to an entire index for the individual investor. Instead of creating separate orders to buy each asset from a particular index an investor can buy an ETF which covers the index. No need for multiple orders or manually updating your holdings when there is a change to the index. The provider that issues the ETF will reflect changes in the index automatically. You pay for this service after all via the expense ratio indicated by the provider.
Advantages of ETFs
- ETFs tend to be more cost-effective than your typical index fund.
- Easy to buy and sell.
- Investing in specific themes is more accessible for individual investors.
Disadvantages
- Certain ETFs might not be available in your country or region
- Depending on tax treatment in your country or region it may be more advantageous to buy the stock holdings directly yourself rather than an ETF.
ETF providers
There are numerous providers of ETFs in the market, the list below outlines the largest providers:
- iShares by Blackrock
- Vanguard
- Invesco
- SPDR by State Street
- Proshares
Popular ETFs
- SPY by State Street
- VOO by Vanguard
- QQQ by Invesco
- TLT by iShares