ETF Funds – Overview
The term ETF means; exchange-traded funds. These allow you as an investor to purchase large sets of individual stocks and corporate and government bonds in a single purchase. ETFs and mutual funds are similar in that they both allow you to purchase in bulk, with differences in trading. For example, ETFs are monitored by algorithms tracking the entire economy, while with mutual funds, you rely on the prowess of your fund manager. This brings about the difference in the management expense ratios (MERs).
Types of ETFs:
As an investor, various types of mutual funds are available for your purchase, these include:
The stock market tracking ETFs
In simplistic explanation, these are your chance to own a fraction of the American economy. This is attributed to their ability to attract the bulk of investors due to their mirroring of the indices. The ETFs track various indices, including; the S&P 500, which comprises the 500 publicly traded American companies. These companies possess the advantage of being the ones that have the highest market capitalization. Investing in ETFs offers you the advantage of diversifying your portfolio. This is due to the other options offered besides the S&P 500.
The S&P 400 and the Russell 2000, which tracks the mid-cap and small-cap publicly traded companies are the other options available to you. These options provide the advantage of automatically diversifying your investment, as you can easily track the past performances of your option by looking at the previous market activity.
Tracking ETFs
This option is best applicable to those investors who want to focus on a specific sector of the economy instead of the entire economy. Getting an insight into the sectors of the economy has been facilitated by the Standard and Poor’s (S&P) as well as the MSC, which have generated a global economic taxonomy.
This ensures that all publicly trading companies fit in one of the 11 main sectors of the global economy, referred to as the Global Industry Classification Standard (GICS). However, as an investor, you are not limited by the 11 classifications as some ETFs go an extra mile to track the existing sub-sectors of these classifications.
International ETFs
These are for investors aiming to invest in international stocks. This means the ETFs enable these individuals to invest in companies registered in other countries. This classification is similar to the ETFs that focus on developed or emerging markets. Developed markets mean the markets of countries with established rules of law as well as technological capabilities in comparison to other options. In contrast, developing markets are related to countries with lower per capita average salaries and minimal political stability.
What to Think About When Buying ETFs
To purchase ETF funds, you need to consider the following concepts. First, you need to open a brokerage account. This enables you to buy as well as sell ETFs. These provide an advantage as the process has been designed to allow you to do it online to completion. The other advantage is that most of these accounts do not have an account minimum, transaction, or inactivity fees.
However, before investing, I recommend doing extensive research into the companies offering ETF investments as much as the options offer various opportunities to grow your wealth. The result depends on the company you choose to avail yourself of the opportunity. It’s important to thoroughly investigate the brokerage firm to understand their capability to assist you in taking advantage of the market to grow your wealth.
How to Buy ETF Funds
The process of buying ETF funds is quite simple. You first need to open a brokerage account with your preferred brokerage firm. When selecting a firm, you should consider reviewing the services offered and the advantages available to you compared to other firms. The next step involves deciding on the ETFs to buy, which can be assisted by numerous screening tools offered by various brokerage companies. These tools give you the administrative expenses involved, commissions, and trading volume over some time, among other advantages.
The final stage involves placing a trade which is a process similar to the process of buying stocks. This can be done online where you can buy or sell ETF using its ticker symbol, a unique identifier reserved for the type of ETF you are purchasing.
Here you find the price per share, where you can choose the number of shares you want to buy, as well as the type of order, which ranges from; market order which involves the best available price, the limit order, which involves purchase only at a specified price and stops order, which involves buying only when a predetermined price has been reached. Other options include a determination of the funding source as well as the commission the brokerage will earn for its services.
I hope this article was helpful and that you found it interesting. If you have any questions, we will be more than happy to answer them below.
All the best,
Pete