Today we will focus on what ETFs are and why it pays to invest in them. These are exchange-traded funds that have been known on the American stock exchange since 1993. Exchange-traded funds have recently enjoyed great popularity from retail investors. Like open-end mutual funds, they offer the opportunity to invest in a large number of different stocks and capital market instruments by purchasing only single security. However, the ETF and the mutual fund are not the same. In particular, there is one fundamental difference between a mutual fund and an ETF. The mutual fund is usually managed actively and the ETF passively. ETFs are not managed by active managers, but passively follow the development of asset prices and copy their movement.
And how do ETFs work? Their operation is a little more complicated. There are certain assets in the ETF that the fund buys. Subsequently, the fund will issue shares that you can acquire as an investor. ETFs can freely choose their underlying assets - from commodities to stocks to currencies and bonds. There are several ETFs that we will mention now:
Index
Index ETF funds basically copy selected stock indices. They contain the same set of shares and also copy their price development. Among the most popular are American stock indices, such as the S&P 500. However, you can also choose German or Japanese index funds.
Commodity
When you buy a commodity ETF, you usually do not buy commodities, but financial derivatives. Financial derivatives are financial products whose value depends on the value of the underlying asset, in this case, a certain commodity.
Sectoral
As the name implies, sector ETFs focus on a specific sector, ie the shares of companies from one sector, such as energy, finance, or technology. Sector ETFs operate similarly to index funds.
Bond
Bond ETFs can include both government and corporate bonds. In this case, the ETF copies bonds that have low liquidity. Through ETFs, bonds can be traded and the benefits of ETFs can be used.
What are the main benefits of ETFs?
The biggest advantages of ETFs are certainly low fees. Nowadays, there are brokers who do not even charge a fee for buying and selling ETFs. In addition, ETF trading is flexible because shares are sold and bought on the stock exchange as easily as shares.
And how to start?
You will need a broker to invest in ETF funds. You need to choose the right one. The best broker is eToro, LYNX, or XTB. To open a trading account, you must fill in login details, personal data, and identity verification. Finally, you deposit money into your account either by bank transfer, credit card, or via PayPal. After this step, all you have to do is choose the ETF you want to buy.
