What are ETF's?

What Does ETF Stand For?

ETF stands for exchange-traded funds. These are a type of investment that utilizes the two very popular investment vehicles: mutual funds and stocks.

ETFs are similar to mutual funds as they offer plenty of ways to diversify your portfolio. In addition, they usually have lower expense ratio fees compared to mutual funds.

ETFs are also like stocks as they can be easier to trade. They each have individual ticker symbols to help you monitor its price activity.

Yet unlike stocks, ETFs are not a single company—they are a group of companies in one. This can help some traders to reduce their risk but still invest in multiple assets.

Are There Different Types of ETFs?

There are a variety of ETFs for investors to choose from. 

While ETFs offer flexibility to help investors strengthen their portfolio, it’s key to know your own investing style before engaging with one or more ETFs to manage your risk and assets.

• Market ETFs: ETFs that track or match financial market indexes such as the S&P 500.

• Bond ETFs: Municipal bonds that could include state, local or government bonds.

• Commodity ETFs: Designed to invest in commodities like agriculture, gold and crude oil.

• Currency ETFs: Designed to invest in currencies such as the Japanese yen or European euro.

• Inverse ETFs: Designed to profit from stock declines.

• Exchange-traded notes (ETNs): Debt securities from a bank designed to give investors access to the return of a market index or other benchmark.

What Do ETFs Look Like In The Marketplace?

ETFs make it easier for beginner investors to gain access to almost any market or industry. 

While they still pose risks like any other investment, ETFs help investors get in and out of markets quicker, as well as profit from short-term swings (i.e. buying and selling stocks based on its up or downward trend to make quick, but sometimes risky gains).

When searching for the right ETF to invest in, they can either track an index of stocks or a specific industry. Here are a couple of example types of ETFs you’ll see in the marketplace:

• SPDR S&P 500 (SPY): The oldest and most popular ETF that tracks the S&P 500 Index.

• Sector ETFs: These ETFs target industries like financial services (XLF), energy (XLE) and oil (OIH).

What Are The Cons and Pros of ETFs?

Let’s start with the cons of ETFs:

• Trading fees: While the expense ratio fee may be low, there could be additional costs such as commission fees from online brokers.

• Illiquidity: Some transactions are hindered by not being able to easily sell or exchange without losing money. 

• ETFs might close: When ETFs don’t bring in enough assets to offset administrative costs, the ETF will close. This can force traders to sell or exchange before they were ready, which could be at a loss.

Now, here are the pros of ETFs:

• Easy to trade: Like stocks, you can buy and sell at any time of the day, whereas many mutual funds are traded at the end of the day.

• Transparency: While a mutual funds’ holdings are made public monthly or quarterly, index-based ETFs publish their holdings daily.

• Tax-efficient: ETFs generally produce lower capital gain distributions. They are usually taxed when selling the investment.