What Is an Exchange-Traded Fund (ETF)?

What is an ETF?

An ETF, or Exchange-Traded Fund, is a type of investment fund that is traded on stock exchanges, similar to individual stocks. 

It is a collection of assets such as stocks, bonds, commodities, or a mix of these. ETFs can be structured to track anything from the price of a commodity to a large and diverse collection of securities.

How ETFs Work

• Asset Collection: ETFs can consist of a mix of stocks or bonds. For instance, an S&P 500 ETF includes all the stocks listed in the S&P 500 index.
• Exchange Trading: Similar to stocks, ETFs are traded on stock exchanges throughout the trading day. This results in their prices fluctuating based on supply and demand.
• Market Value: The market value of an ETF may differ from its net asset value (NAV), which is calculated by dividing the total value of the assets held by the ETF by the number of shares in circulation.

Types of ETFs

• Stock ETFs: Track a particular stock index, like the S&P 500 or the NASDAQ.
• Bond ETFs: A portfolio of bonds.
• Sector and Industry ETFs: These focus on specific sectors like technology, healthcare, or energy.
• Commodity ETFs: These track the price of commodities such as gold, oil, or agricultural products.
• International ETFs: These invest in stocks or bonds from countries outside your home country.

Benefits of ETFs

• Diversification: By investing in an ETF, you get exposure to a broad range of assets, and has a lower risk compared to investing in individual stocks.
• Lower Costs: ETFs generally have lower expense ratios compared to mutual funds because they are passively managed.
• Liquidity: ETFs can be bought and sold easily on the stock exchange, providing high liquidity.
• Transparency: ETFs disclose their holdings daily, so you know exactly what you're investing in.

How to Invest in ETFs

1. Open a Brokerage Account: To buy and sell ETFs, you need a brokerage account. We highly recommend opening your account through our preferred custodian Altruist.
2. Research ETFs: Look at the performance, expense ratio, holdings, and the index that the ETF tracks.
3. Place an Order: You can place a buy order for the ETF through your brokerage account. Specify the number of shares or the amount of money you want to invest.
4. Monitor Your Investment: Keep an eye on how the ETF performs and to ensure it aligns with your investment goals.

Risks of ETFs

• Market Risk: Since ETFs track the market or a sector, their value can go up or down with the market.
• Tracking Error: Sometimes an ETF may not perfectly track the index or asset it is supposed to, causing slight performance differences.
• Liquidity Risk: Some ETFs, especially those that track niche markets, might have lower trading volumes, making it harder to buy or sell shares without affecting the price.

Pros and Cons of ETFs