Dear reader,
Today I am going to explain to you what an ETF is.
An ETF (exchange-traded fund) is a passive investment fund that replicates a stock index, a bond index, a sector, commodities or other assets such as cryptos.
INVESTING IN ETF's, IS IT WORTH IT?
As I always say, it depends on your strategy, but very often the answer is yes and here it's why.
When you buy an ETF, is the same as buying a stock. In fact, ETF can be purchased and sold on a stock exchange as a regular stock would do and their price fluctuates all day like a normal stock; this is a difference between mutual funds, which trade just once a day once the market closes and are not traded on an exchange.
ETF's have also very small fees compared to any other fund and the reason for this is that ETF's have a passive investing strategy, they just replicate what an index or a commodity does, there is no active action from the fund manager in whether buying or selling a stock.
Another positive aspect of ETF's is diversification. Just imagine this, you want to diversify your portfolio and you want to accurately copy the S&P500 performance by yourself. This operation would cost you thousands of money and lots of time. In fact, the stocks that compose the S&P 500 can change over time and so you should constantly update your portfolio. By buying an ETF, you don't worry about this and, if you don't have a large liquidity to invest, you can still diversify your investment. Just consider this, as I said before, to copy the S&P500 you should invest thousands of euros and lots of time, by buying an ETF you will spend in some cases less than 100 euros and you will not have to worry to balance your investment: if you invest in an ETF you will just have to make one transaction to buy and one to sell.
Please remember that for its diversification, an ETF usually has very little volatility so it should be considered as an investment in a long-term perspective.
ACCUMULATING ETF's AND DISTRIBUTING ETF's
As you may know, some stocks pay dividends to their shareholders either to attract new investors or to thank the investors. But what an ETF does with dividends? Well, it depends if it's an accumulating or a distributing ETF.
An accumulating ETF is an ETF in which every dividend is reinvested in the fund by the fund manager. As a result, the value of the ETF increases.
On the opposite, a distributing ETF is an ETF that pays out dividends to investors.
In terms of capital gain, there is absolutely no difference, is just a different strategy. For example, if you are looking for a passive strategy where you do not have to worry too much about managing your money, an accumulating ETF is probably what you are looking for.
HOW TO BUY AND CHOOSE AN ETF
You can buy an ETF online from online brokers but also from traditional broker-dealers.
To choose the best ETF for you and your strategy, you need to check those and other criteria:
- Management fees, the lower they are, the less of your investment is given over to fees. Sometimes it is still better to invest in more expensive ETF's because they perform better than the cheap ones.
- Performance, you always need to check the past performance of ETF's and compare it with what the index/commodity has done in the same time. Even if passive performance is not an indicator of future returns, this is a very common metric for comparing ETF's.
- Volume, trading volume over a specific amount of time. This helps you to understand and compare the popularity of different funds.
HOW I SEARCH FOR ETF's
I search for ETF's on a website called JustETF in which you can compare different ETF's, to see their characteristics, documents, fees, past performances and a lot of other criteria.
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