ETF: Exchange Traded Fund.
Now that you know what the acronym stands for, let's talk about what they do!
What are ETFs?
ETFs are investment funds traded on stock exchanges which allow investors, like you and I, to purchase a basket of stocks, commodities, currencies or bonds at a unit price set on the net asset value of the fund.
What do ETFs invest in?
ETFs are structured in various ways. There are index ETFs that track market indices, ETFs that hold stock in certain industries, ETFs that hold gold or other commodities, and more. Basically, ETFs can invest in any arrangement of stock, bonds, currencies or commodities.
Why should I bother with ETFs?
ETFs are a great investment for those who wish to buy the general stock market, diversifying their assets and allowing their funds to grow passively.
Like mutual funds, there are costs associated with the management of the investment fund. On top of this, however, are commission charges for buying or selling ETFs.
The big point of buying ETFs and mutual funds over individual stocks and bonds are the point of diversification. Over the long run, diversification reduces your risk exposure to fast and sudden moves to individual companies' performance without impacting your returns.
Imagine if you owned one stock and it went bankrupt. You would be down all your money. However, by investing in an ETF or mutual fund with, say at least 10 stocks, if one company fails, your investment would be down 10%, not 100%! Just a simple lesson on why ETFs and mutual funds help in the game of diversification.
In summary, ETFs are wonderful investment vehicles to grow your assets. Using ETFs allow you to develop a strong foundation for your portfolio to grow while being well diversified.
If you want to learn more about the individual components of ETFs, such as stocks, bonds or REITs, click below!
What are Stocks?
What are Bonds?
What are REITs?