Exchange-traded funds, ETFs for short, are one of the most popular investment vehicles in the financial markets. An ETF is an investment fund that’s similar to a large basket that holds a variety of financial instruments; think corporate shares or government and corporate bonds. Because ETFs are so diverse in their holdings, purchasing one ETF allows you to hold a large variety of financial investments with one purchase.
ETFs trade like individual stocks, so you can buy and sell ETF shares during any point in a trading day at a specific market price. When you purchase shares of an ETF, you are essentially investing in the underlying investments within that ETF. These investments typically consist of stocks, bonds, or a mixture of the two.
Think of an ETF as an investment hotpot that holds together the component ingredients of the meal. Instead of meat, lettuce, seafood, dumplings and noodles, these pots are filled with stocks or bonds. From the perspective of an investor like yourself, buying one share of an ETF is much like buying into several small portions packaged nicely together.
One of the major advantages of buying an ETF share is the benefit of diversity. Having a diverse portfolio is one of the three golden rules of investing that we can never stress enough of. Diversification is the most important component of reaching your long-term financial goals while minimizing risks along the way.
Most ETFs are passive, which means that they track movements in the financial markets. In simple terms: if the market does well, the ETF performs well. Unlike mutual funds however, there is no active manager trying to manage these funds to beat the market. The lack of a personal touch, in turn, makes an ETF less costly.
Moreover, since ETFs are traded like individual stocks, ETF share prices change throughout the day – investors have greater flexibility in buying and selling shares. ETFs also offer more transparency as they may offer more up-to-date information about what’s in them than mutual funds. Many ETF providers disclose their public holdings every day, while mutual funds are only required to disclose their holdings quarterly.
Investing can be a little daunting for first-time investors, so we have listed out three commonly purchased ETFs that track several US stock market indexes for you. These ETFs are passively-managed funds that simply mirror their respective indexes.
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