What is an ETF?

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Overview

An ETF (Exchange Traded Fund) is a security that tracks things like indices, industry sectors, commodities, or specific investment strategies, and can be bought or sold the same as a regular stock. An ETF is called an exchange traded fund because it's traded on an exchange just like a stock. An ETF can be set up to track anything from the price of an individual commodity such as oil to a large collection of securities such as the Nasdaq 100. A well-known example of an ETF is the Invesco QQQ, which tracks the Nasdaq 100 Index. ETFs can contain a wide range of investments, including stocks, commodities, and bonds. The share price of an ETF will vary throughout the trading day as shares are bought and sold.

ETFs are often compared to Mutual Funds. Two main differences are that ETFs can be traded on an exchange throughout the day while Mutual Funds trade only once per day after the markets close. Also, ETFs tend to be more cost-effective when compared to Mutual Funds because ETFs offer low expense ratios and fewer broker commissions than Mutual Funds. The similarities are that Mutual Funds and ETFs can be comprised of multiple assets rather than only one (like a stock) and because there are multiple assets within an ETF, they are a popular choice for diversification.

Types of ETFs

  • Bond

  • Stock

  • Industry

  • Commodity

  • Currency

  • Inverse

Popular ETFs

  • The SPDR S&P 500 (SPY) that tracks the S&P 500 Index.

  • The iShares Russell 2000 (IWM) tracks the Russell 2000 small-cap index.

  • The Invesco QQQ (QQQ) indexes tracks the Nasdaq 100 technology stocks.

  • The SPDR Dow Jones Industrial Average (DIA) tracks the 30 stocks of the Dow.

  • Sector ETFs track industries such as Oil (OIH), Energy (XLE), and Financial Services (XLF).

  • Commodity ETFs track commodity markets including Crude Oil (USO) and Natural Gas (UNG).

  • Physically backed ETFs track metals like SPDR Gold Shares (GLD) and the iShares Silver Trust (SLV).

Pros & Cons

  • Access to a wide variety of stocks across various industries

  • Low expense ratios and fewer broker commissions

  • Risk management through diversification

  • ETFs exist that focus on targeted industries

  • Actively managed ETFs have higher fees

  • Single-industry-focus ETFs limit diversification

  • Lack of liquidity hinders transactions

Conclusion

Exchange Traded Funds (ETFs) are a great way to trade or invest if you are looking for lower fees, higher liquidity, diversification and a wide variety of options without the volatility of single company stocks.

Happy Trading, Verdia

Charles E Winchester