Similar to regular stock, investing in ETF refers to the process of buying or selling a pool of assets including different commodities, stocks, currencies and more on a stock exchange. The price movements of an ETF depend on the existing assets it holds. This implies when the value of one or more assets increases, the value of the ETF’s shares tends to increase as well, and vice versa. Investors can have a clear notion of the profitability of an ETF based on factors like the issuer, fund, and demand which can be easily analysed through keeping up with updated ETF news. This article will demonstrate various aspects of investing in ETF for a beginner to get started with.
Understanding exchange-traded fund (ETF)
An ETF is a sort of fund that can be actively traded on a stock exchange. While the charges for ETFs are frequently cheaper than other forms of assets, the risk factor can be varied on the type of ETF. The issuer maintains the underlying assets, creates a portfolio to monitor their value, and offers buyers shares in that fund. Although an ETF’s investors own a piece of the fund, they do not hold the underlying assets. An ETF might own large numbers of companies from a multitude of sectors, or it can be focused on a single area or industry. ETFs are a preferred option for diversifying the portfolio since they contain a multitude of assets.
Perks of investing in ETF
- Access to a diverse range of equities from a multitude of sectors
- Expense ratios are low, and brokerage fees are low
- Some ETFs specialise in certain sectors
- Diversification helps to control risks
Drawbacks of investing in ETF
- Charges for directly managed ETFs are higher
- Trades are hindered by the limitation of liquidity
- ETFs that are focused on one industry restrict diversity
Classification of ETFs
- Stock ETFs
Stock ETFs are a collection of equities that follow a certain market. The goal is to give a diverse experience to a single sector, one that comprises strong achievers as well as newcomers with investment opportunities. Stock ETFs, as opposed to mutual funds, have cheaper costs and do not require direct shareholding.
- Bond ETFs
Bond ETFs are utilised to offer traders a steady flow of revenue. The allocation of their earnings is influenced by the effectiveness of the underlying assets. Bond ETFs, contrary to their underlying assets, may not have a set maturity period. They usually trade at a profit or a deficit to the value of the real bond.
- Industry ETFs
ETFs that are focused on a singular sector is referred to as industry ETFs, where companies in a specific sector will come under that ETF. The goal of industry ETFs is to acquire access to an industry’s potential by evaluating the status of firms within this field. During certain market trends, industry ETFs are also utilised to move in and out of industries.
- Currency ETFs
Currency exchange-traded funds have a variety of uses from speculating on currency values depending on a country’s social and financial events to broaden the portfolios or as a hedge against price fluctuations in the FX markets. Many of them are employed as a form of inflation protection as well.
- Commodity ETFs
Different types of commodities come under commodity ETFs as the name implies. Investors can get benefitted in several ways through this type of ETF such as diversifying their portfolio as, during a stock market downturn, commodity ETFs might act as a safety net. Apart from that, it is also less expensive to own shares in a commodities ETF than it is to own the commodity itself.
- Inverse ETFs
By short-selling equities, inverse ETFs try to profit from market shortfalls. Shorting is the act of releasing a stock and then reinvesting it at a cheaper price, anticipating a price drop. An inverse ETF employs derivatives in the occurrence of shorting a stock. They are, in essence, wagers on the market’s collapse. When the price drops, the value of an inverse ETF rises proportionately.
When utilised appropriately, ETFs may be highly secure investments. Since there are certain risks are incorporated with ETFs similar to different investments, it is crucial to get proper knowledge before investing in one.