These days, you’ve got lots of choices when it comes to investing. If you’re looking to generate the highest return on your investment, you may be inclined to put your money into stocks, as the stock market has historically performed better than the bond market.
But what if you’re not comfortable with the idea of choosing your own individual stocks and banking on their stellar performance? What if you’d rather limit your exposure but still make money at the same time? If this sounds like you, then ETFs might be the right investment vehicle to pursue.
How They Work
ETFs, or exchange traded funds, are securities that track specific assets, indexes, or commodities. ETFs are similar to mutual funds in that they offer investors shares in a pool of stocks, bonds, or other assets. Unlike mutual funds, ETFs trade just like regular stocks on the stock exchange. The price of an ETF can go up and down throughout any given day, just like a stock. There are well over 1,000 ETFs out there to choose from, and over the past decade, the number of ETFs has grown by 27% a year on average.
If an ETF performs well, investors are entitled to a percent of the profits, including dividends or interest. But this is just one of the benefits of ETFs. Other advantages include:
- Liquidity. ETFs are relatively liquid in that they can be easily bought or sold. Since they trade publicly, it’s easy to get pricing and make a move accordingly. You can buy or sell an ETF at any point during the trading day when the market is open. Mutual funds, by contrast, are traded based on the closing price of the day.
- Diversification. If you invest in a single ETF, you’ll get exposure to a range of equities or segments of the market. This can be a much safer bet than buying an individual stock.
- Lower fees. ETFs are passively managed, which means they have fairly low expense ratios compared to mutual funds. With mutual funds, you’re more likely to pay a hefty management fee, which can eat away at your returns.
Are ETFs a Good Investment for You?
ETFs can be a good investment choice, but they’re not for everyone. The fact that ETFs are passively managed is a good thing in that it contributes to lower fees, but some financial experts believe that actively managed funds are more likely to perform better in the long run. You’ll need to weigh the benefit of lower fees against potentially lower returns.
Another factor to consider is your knowledge of the market and comfort level in terms of choosing individual stocks. If you’re new to investing or don’t have the time to do your own research, then ETFs might be a safer option for you. On the other hand, if there’s a sector you’re comfortable researching, you might be better off buying individual stocks.
Though some people have success with ETFs, as is the case with all investments, there are no guarantees. Your best bet, therefore, may be to use ETFs as just one component of your overall investment strategy.