To ensure your present and long-term financial security, it’s crucial to learn how to invest your money — whether it’s in classic stocks or established cryptocurrencies like Bitcoin. But with so many investment types out there, it can be hard to find the right kind to include in your portfolio.
One investment type you should strongly consider investing in is exchange-traded funds (ETFs). These investment funds have become popular amongst those who have limited experience or knowledge in the stock market, as they allow investors to own a diversified set of securities, like bonds or stocks, without breaking the bank. To help you get started on investing with ETFs, we’ve come up with a short guide on what you need to know.
Simply put, ETFs are a type of fund that involves a set of securities and tracks an underlying index. ETFs are listed on exchanges, and their shares are also traded during regular trading hours as with stocks. What separates ETFs from other investment types is that it allows investors to buy and sell a bunch of assets without having to buy the individual components.
So how do ETFs work? Companies that own underlying assets create funds to track their performance and then sell shares in that fund to anyone who’s ready to invest. While ETFs are mainly crafted to track how an underlying asset or index performs, they can also be traded at market-determined prices. Shareholders of a company own a portion of an ETF, but the underlying assets are free from the shareholders’ control. Those who choose to invest in ETFs get reinvestments or lump dividend payments for the type of security that make up the index.
Despite being traded on the stock exchange, ETFs can give you access to almost any kind of asset. For one, you can choose to invest in stock ETFs like the Vanguard Balanced ETF Portfolio (VBAL). This carries less risk compared to individual stocks as investors often choose it with long-term growth in mind. If you prefer something that can provide a steady inflow of cash, you can invest in bond ETFs, which generate regular cash payments as these don’t have a maturity date. Some interesting bond ETFs here in Canada that you can put your money in is the BMO Aggregate Bond Index ETF (ZAG-T) and the iShares 105 Year Laddered Government Bond ETF.
Then, you have physically-backed ETFs, which replicate the performance of the index by physically holding the index constituents. Gold ETFs belong in this category, with SPDR Gold Shares (GLD) and VanEck Merk Gold ETF (OUNZ) being some of the most popular ones here in Canada. Physically backed ETFs provide the benefit of being able to access precious metals without having to deal with price markups, security risks, and storage costs associated with physically owning these kinds of assets.
All in all, choosing to invest in ETFs is a great way to diversify your portfolio and better manage your risk. And since you get the benefits of an asset without having to buy its components, ETFs don’t require a lot of effort and cash to start investing. Another great thing about ETFs is their transparency, as the price activity for a particular ETF can be easily accessed on the internet. Moreover, the fund’s holdings are revealed to the public every day, unlike in other investment vehicles like mutual funds, where holdings are disclosed every quarter.
Also Read: Stock Market Tips That Everyone Should Know
However, there are also a couple of drawbacks when it comes to investing in ETFs. For one, if you’ve chosen to invest in an ETF that isn’t traded as frequently, it can be harder to sell and get a return for your investment. You also have to be picky when it comes to choosing an online broker, as some charge unreasonable commission fees for their services. There’s also the risk of closure when a fund hasn’t netted enough assets to make up for administrative costs — forcing investors to sell sooner than planned.
And as with any kind of investment, ETFs hold tax and trading risks — and it’s your job to figure out how to play this to your advantage. It takes a lot of time and effort to study how ETFs work in the market, but learning how to properly invest in it can help you generate a sizable profit and secure your long-term finances.