Exchange-traded funds (ETFs) are popular among amateur and professional investors alike because they provide instant diversification and can easily be traded (bought and sold) during the trading day. This guide explores the benefits of ETFs and shows you how to buy them.
Start Trading in 3 easy steps
1. Open a Free Account
It’s really easy to open a trading account with an online broker by entering your personal details (name, address, email address, etc.) and uploading any required identification documentation.
2. Make a Deposit
Most brokers let you fund your account via very convenient methods such as bank wire transfer, credit/debit card, and sometimes other methods such as PayPal.
3. Start Investing
Your broker will list the ETFs that are available to trade. Click any one of them to see a price chart, then press the “buy” button to invest or stake the amount you specify.
What are ETFs?
ETFs pool the money from several investors and invest that money in a basket of stocks or other assets, so in this respect, they’re like traditional mutual funds. ETFs can be bought and sold throughout the trading day in the same way that you would buy and sell a single stock, so in this respect, they’re unlike mutual funds that can only be bought or sold once per day.
Investors looking for diversification can buy shares in a single index-tracking ETF rather than (for example) buy all the constituent stocks of the FTSE 100 index individually.
How Do ETFs Work?
An Exchange Traded Fund (ETF) is constructed by an Authorized Participant (AP) that purchases securities in a new fund created by an ETF company. The AP is a big financial institution that offers shares in these ETFs to traders via brokers. Although holders of ETF shares don’t hold the stocks or other assets within the ETF, they do benefit from the dividends paid by the constituent stocks.
ETF shares can be bought and sold at any time during the trading day in the same way that you would buy and sell single stocks, which means you can use the same order types that you would use for trading stocks; e.g., limit orders and stop orders. This is different from mutual funds that can only be bought or sold once per day at their valuation point.
Types of ETFs
There are different kinds of ETFs, for example:
- Stock ETFs contain a basket of stocks from a particular sector or that are the constituents of a particular stock index such as the S&P 500 index.
- Commodity ETFs invest in combinations of commodities such as gold, oil, lumber, corn, coal, and more.
- International ETFs can provide excellent exposure to US and non-US stocks.
Should You Invest in ETFs?
When considering the question of investing in ETFs, we have to look at various factors. Your investment goals, risk appetite, and trading styles will determine whether they are a good fit for you. They’re a good fit for many investors because they provide the same benefits as mutual funds (e.g., diversification) with the added advantage that you can trade them throughout the day. Since many ETFs are simple index tracking funds, they generally have low fees compared with actively managed funds.
Just like stocks, ETFs allow you to benefit from both capital appreciation and dividend income. As such, ETFs may be suitable for steady returns over an extended period. They’re not get-rich-quick scheme.
Pros and Cons of Investing in ETFs Funds
Where to Start Trading ETFs?
ETFs are made available by several different providers. Since they’re traded like stocks on stock markets, you buy and sell them via a broker. Whether you’re trading ETFs or individual stocks, it’s important to choose the best broker for you. To help you find a regulated broker with low fees and other attractive features, we’ve compiled the following list:
Expert Tip for Buying ETFs“ Leveraged ETFs amplify your potential gains (and losses, so be careful). Inverse or short ETFs allow you to benefit from falling prices. Inverse leveraged ETFs do both. The problem is that the advertised returns are not accurate if you hold such ETFs for longer than a trading day, so they may be best avoided by beginners. ”- Shams Ul Zoha
Top ETFs to invest in right now
With the Covid-19 pandemic hopefully coming to an end, and with markets hitting new highs (at the time of writing), you might consider it to be a good time to invest in ETFs. Although you should always do your own research before investing, here are a few of our favourite ETFs.
SPDR S&P 500 ETF (SPY)
The popular SPY ETF tracks the S&P 500 index of US stocks. Having more-or-less replicated the performance of the underlying index, by July 2021 this ETF’s value rose by more than 85% from its March 2020 (temporary) low point. The ETF price has risen almost fivefold in the 12 years since 2009. This is the ETF to buy if you consider past performance to be a predictor of future performance.
Vanguard Information Technology Index ETF (VGT)
LIke SPY, the VGT ETF has also enjoyed impressive performance since March 2020 and has risen more than tenfold since 2009. All markets have been in a sustained uptrend for more than a decade, and many technology companies benefited from the shift to online working — and shopping, and playing — driven by the coronavirus pandemic. If you think this shift will be sustained post-pandemic, you could consider buying this Vanguard ETF.
Vanguard FTSE All-World ex US ETF (VEU)
By July 2021, this ETF had almost doubled in value since the March 2020 low point but has returned only to the price level it reached in 2007. This is because non-US equities have not matched the performance of US equities. The case for investing in this ETF is that the rest of the world could close the gap with the USA.
ETFs allow you to protect your portfolio by diversifying across many stocks while benefiting from the capital appreciation and dividend income from the individual constituent stocks. The ability to buy and sell during market hours allows you to employ various trading strategies and to use a range of order types such as stop orders and limit orders.
Frequently Asked Questions
ETFs are considered good investments for beginners because they provide diversification and allow you to track stock indices without having to separately buy all the stocks in those indices.
You can buy ETF shares with just a few hundred dollars but you may need a minimum deposit to open an account with a broker.
You can sell ETFs at any time during market trading hours, and you can place pending orders such as stop orders (even outside market hours) that will sell your stake automatically — to limit your loss or secure some profit — if the price falls to a specified level.
Not all brokers allow you to trade ETFs, but many do, so there are plenty of brokers to choose from if you’re interested in investing in ETFs.
It’s the right time to invest in ETFs as speculative assets if you think they will rise in value, or continue to do so, so that you can profit from capital appreciation. Even if the ETF price doesn’t rise, you can potentially accumulate dividend income.
Leveraged ETFs are risky for beginners, not only because leverage amplifies losses but also because these ETFs don’t deliver the advertised returns if held for more than a day.