Exchange-Traded Funds (ETF): a good option? Check it out

Exchange-traded funds (“ETFs”) are investment funds that are traded daily like regular stocks on the stock market but tracking specific indexes or assets.

This type of investment fund has a set of particular characteristics that make it an appealing option for those who look into diversifying their investment portfolio without spending that much money. To learn more, keep reading our article.

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Exchange-traded funds were developed primarily with the intention of helping smaller investors gain access to the stock market.

Most ETFs are index funds that try to replicate the performance of a specific index. Those indexes can be based on stocks, bonds, commodities or foreign currency, for example.

ETFs have the advantage of being a way to offer investors an option to be able to track the return of the indicators for their funds, whether they are positive or negative.

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How they are managed

ETFs tend to present a passive form of management. This means they are managed with more concern towards replicating performance and development of the benchmark index even when other stocks not included in the index seem to have better return prospects.

This differs from that of traditional investment funds due to the latter being more focused on searching actively for the best investment opportunities in order to achieve greater return than the benchmark while maintaining grounds with the investment policy established by their regulations.

Types of ETF

The most well-known type of ETF that exists is naturally the one that track stocks. Many funds follow indexes such as the S&P 500. But within it they can track a variety of stock indexes including broad market, sectorial, regional and global ETFs.

Nonetheless, there are other kinds of exchange-traded funds like:

  • Bond
  • Commodities
  • Real estate
  • Leveraged
  • Active management
  • Inverse

Benefits

Exchange-traded funds essentially combine appealing characteristics of both traditional funds and market stocks. When an investor purchases a fund, they are essentially purchasing a collection of stocks or bonds.

Because they involve fewer individual transactions, ETFs are generally easier to trade, even when done through brokers.

This has an impact on another benefit that occurs, which is that ETFs have lower costs when compared to traditional investment funds due to lower management fees, as well as lower broker commissions.

Exchange-traded funds also provide portfolio diversification to investors by allowing investment opportunities in a variety of industries through a single fund.

Diversifying an investment portfolio is one of the most reliable strategies to improve risk management as well.

The many types of different stocks comprised within ETFs also help to minimize the damage that may occur if any of the stocks is going down.

How to invest

To invest in ETFs, you must seek the assistance of an investment broker or securities distributor, either online or through traditional trading methods.

The value of these assets can be tracked in real time similarly to regular stocks by using the quotations published actively on the market.