Want the ease of stock trading, but diversification benefits of mutual funds? Take a look at exchange-traded funds (ETFs), which combine the best attributes of both assets. It would take a lot of money and effort to buy all the components of a particular basket, but with the click of a button, an ETF delivers those benefits to your portfolio.
An exchange-traded fund is a basket of securities — stocks, bonds, commodities or some combination of these — that you can buy and sell through a broker. ETFs offer the best attributes of two popular assets: They have the diversification benefits of mutual funds while mimicking the ease with which stocks are traded.
Like any financial product, ETFs aren’t a one-size-fits-all solution. Evaluate them on their own merits, including management costs and commission fees, Anchorhow easily you can buy or sell them, and their investment quality.
An ETF gives you a way to buy and sell a basket of assets without having to buy all the components individually. The ETF provider owns the underlying assets, designs a fund to track their performance and then sells shares in that fund to investors. Shareholders own a portion of an ETF, but they don’t own the underlying assets in the fund. Even so, investors in an ETF that tracks a stock index get lump dividend payments, or reinvestments, for the stocks that make up the index. (Related: Learn how to invest in index funds.)
While ETFs are designed to track the value of an underlying asset — be it a commodity like gold or a basket of stocks such as the S&P 500 — they trade at market-determined prices that usually differ from that asset. What’s more, because of things like expenses, longer-term returns for an ETF will vary from those of its underlying asset.
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Generally speaking, ETFs have lower fees than mutual funds — and this is a big part of their appeal. Whereas the average U.S. equity mutual fund charges 1.42% in annual administrative expenses — what’s called an expense ratio — the fees on the average equity ETF are 0.53%, according to data from ETF.com, a subsidiary of the Chicago Board Options Exchange that’s dedicated to these investments.
ETFs also offer tax-efficiency advantages to investors. There’s generally more turnover within a mutual fund (especially those that are actively managed) relative to an ETF, and such buying and selling can result in capital gains. Similarly, when investors go to sell a mutual fund, the manager will need to raise cash by selling securities, which also can accrue capital gains. In either scenario, investors will be on the hook for those taxes.
ETFs are increasingly popular, but the number of available mutual funds still is higher. The two products also have different management structures (active for mutual funds, passive for ETFs).
Like stocks, ETFs can be traded on exchanges and have unique ticker symbols that let you track their price activity. There’s SPY for one of the ETFs that track the S&P 500, and fun ones like HACK for a cyber-security fund and FONE for an ETF focused on smartphones. That’s where the similarities end, however, because ETFs represent a basket of assets, whereas a stock represents just one company.
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ETFs made up 30% of all U.S. trading in terms of value in 2016, according to Barron’s. Investors have flocked to them because of their simplicity, relative cheapness, and access to a diversified product.
While it’s easy to think of diversification in the sense of the broad market verticals — stocks, bonds, or a particular commodity, for example — ETFs also let investors diversify across horizontals, like industries. It would take a lot of money and effort to buy all the components of a particular basket, but with the click of a button, an ETF delivers those benefits to your portfolio.
Another appeal of ETFs is their transparency. Anyone with internet access can search the price activity for a particular ETF on an exchange. In addition, a fund’s holdings are disclosed each day to the public, whereas that happens monthly or quarterly with mutual funds.
Finally, the tax benefits of ETFs is notable. Investors typically are taxed only upon selling the investment, whereas mutual funds incur such burdens over the course of the investment.
Here’s how to buy your first ETF in less time than it takes to eat dinner at your favorite restaurant.
First, we’re going to make a significant assumption: You already have an account with an online broker where you can buy and sell securities. (Not so? Learn about brokerage accounts and how to open one.)
ETFs are standard offerings among the major brokers, but confirm you can buy them in your account. Selecting individual ETFs often won’t be an option with most robo-advisors; rather, their model is to automate the investment process on your behalf.
Time to decide what you’d like to order. Whether you have a hankering for particular funds or don’t know where to begin, there are ways to narrow your ETF options.
For first-time buyers, a low-cost index fund is an easy way to get a big slice of the market with little effort. These ETFs track an index, like the Standard & Poor’s 500, providing diversification without the hassle of buying numerous individual stocks. For those who want to peruse options, use the robust screening tools offered by brokerages to filter the universe of available ETFs based on a variety of criteria such as asset type, geography, industry, trading performance or fund provider.
There are more than 2,000 funds listed in the U.S. alone, so chances are there are competing products even if you have a specific ETF in mind. Comparison tools on your broker’s website can reveal how similar funds stack up on the following characteristics:
When dining out, you order the desired dish by name. When investing, you order an ETF using its ticker symbol (a unique identifier). Once you navigate to the trading section of your brokerage’s website, the process for buying ETFs is very similar to the process of buying stocks. Here are the basics you’ll need to know:
Before you execute your order, you’ll have an opportunity to double-check that everything’s correct. Don’t rush; even professional investors who buy and sell securities every day can make mistakes.
Congratulations, you’ve just bought your first ETF. These funds can help form the basis of a well-diversified portfolio and serve as the first step in a long-lasting investment in the markets.
There’s no need to compulsively check how this ETF (or your other investments) are performing, but you can access that information when you need it by checking the ticker symbol on your brokerage’s website or by simply typing it into Google.
Exchange-traded funds (ETFs) offer investors the ultimate in flexibility and portfolio construction by making previously unavailable asset classes easily accessible to retail investors. One of these major asset classes is a forex, which, until recently, has been the domain of specialists, and traders/investors have been required to open separate accounts and trade forex as a separate segment of their investment portfolio.
However, with the advent of ETFs, investors can now get exposure to the benefits (and risks) of forex trading in traditional brokerage accounts.
Many investment avenues are available when using currency ETFs. One can go “long” a particular currency with standard currency ETFs or one can “short” a currency, either by shorting the particular ETF or by buying an “inverse” ETF that changes the value in the opposite direction of the underlying index. One can also leverage positions with ETFs that offer 2X leverage to the underlying currency’s index. Finally, ETFs that simulate the action of currency pairs are available which can replicate the trading action of the underlying forex pairs themselves.
Currency ETFs trade just like a stock, move with the underlying foreign exchange rate and offer a convenient, easy-to-understand way to participate in the forex market. While there are differences between currency ETFs and spot forex trading, ETFs offer investors several unique advantages.
Foremost, you can use currency ETFs within the confines of a standard brokerage account and so all of the things you’re used to with a standard stock account apply to currency ETFs. ETFs allow margin, short selling, stop-loss entry and exit opportunities, and reasonable commission structures. Currency ETFs also offer standard stock market margin leverage, and for more aggressive investors, options strategies on currency ETFs are available, including covered calls and buying either puts or calls to amplify potential returns.
Beyond single-currency ETFs, investors can also use currency pair exchange-traded funds that are available in major markets, including the British Pound/U.S. Dollar (GBP/USD) Euro/U.S. Dollar (EUR/USD), and U.S. Dollar/Japanese Yen (USD/JPY).
Like all currency pairs, these ETFs reflect the relative value of the two currencies and fluctuate in value as the underlying relationship of the currencies changes. In the case of the EUR/USD, for instance, when the Euro appreciates relative to the U.S. Dollar, the value of the ETF increases, and when the Euro loses value to the U.S. Dollar, the ETF declines in price.
Investors also can get exposure to the so-called “carry trade” via Barclays Capital Intelligent Carry Index (ICI) that is designed to capture returns from investing in high-yielding currencies with money financed by borrowing low-yielding currencies. The Barclays Carry ETN (ICI) uses a pool of currencies for this strategy that includes major currencies like the U.S. Dollar, Japanese Yen, Euro, Swiss Franc, British Pound, and Australian and New Zealand Dollars.
So it’s easy to see that currency exchange-traded funds offer a simple, convenient way for investors to develop and deploy a potent and flexible arsenal in the world of foreign exchange trading.
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