What Is An ETF? ETFs Explained
Hi, in today’s video, we demystify ETFs, the best of both worlds: stocks as well as mutual funds! So, what exactly is an ETF?
An ETF or an exchange-traded fund is a collection of bonds, shares, and other securities, that tracks an underlying asset. To put it simply, an ETF is a healthy mix of a wide range of investment avenues. It gives you the best attributes of two popular financial assets which are stocks and mutual funds.
ETFs are similar to mutual funds in the way they are structured, regulated, and managed. Like mutual funds, they are a collection of risk adjusted securities, managed by SEC registered advisers, and regulated by the SEC. And what is the SEC? The SEC stands for the Securities and Exchange Commission, which is an independent agency of the US federal government, and functions like the SEBI in India. It was created to enforce the law against market manipulation.
Additionally, just like mutual funds, ETFs are a pooled investment vehicle that offer diversified investment into various asset classes like stocks, commodities, bonds, currencies, options, or a blend of these. What gives ETFs a stock-like flavour is that they can be traded on the stock exchange when the markets are open!
In case you are wondering about Index Funds as we talk about exchange traded funds, the two are different. Index funds are often invested in through a mutual fund and can only be traded once or twice a day.
So, in essence, ETFs give you the risk management and diversification of a mutual fund while being traded like stocks on the stock market! If you’re a new investor, ETFs are a no-brainer.
Advantages of ETFs
So, what are the advantages of ETFs:
First, is the liquidity. Remember how we said that they offer the best attributes of mutual funds and stocks? ETFs offer a risk adjusted collection of securities that are so liquid that they can be bought and sold throughout the day over stock exchanges.
2. ETFs have lower costs
Next, ETFs have lower costs. ETFs can be an easy way to gain exposure to many companies and not have to pay high trading fees. If an investor wants to invest in the top 500 US companies, they can buy a share of the SPX, an ETF for the S&P 500 Index, instead of buying shares of 500 different companies. The expense ratios for ETFs are also much lower than traditional mutual funds. This is because ETF shareholders are not mandated to pay for the team of managers, analysts, and brokers to trade funds on their behalf or manage the fund’s inflows and outflows.
3. High transparency
The third advantage is high transparency. Unlike mutual funds that are only instructed to disclose their holdings quarterly, ETFs disclose the fund’s holdings and its Net Asset Value daily! This means you have more control over your investments.
4. ETFs enable diversification
Lastly, and most importantly for us at Vested, ETFs enable diversification. ETFs allow investors to diversify their portfolio across industries, sectors, styles, or countries. ETFs are also traded on virtually every major asset class, currency, and commodity in the world! Yes, we’re hinting at US-listed ETFs.
ETFs can prove to be quite useful to those investors who are seeking exposure to a specific industry, asset class, region, or currency at a reasonable cost. For example, the INVESCO NASDAQ 100 ETF tracks the investment results of the NASDAQ-100 Index, while the Invesco China Technology ETF seeks to track the investment results of the FTSE China Incl A 25% Technology Capped Index. It basically gives you strategic exposure to the Chinese technology sector in an easy manner.
As a new investor, you do not have to worry about researching specific industries – all you need is an ETF with a reasonable expense ratio, liquidity, and assets under management. Also, thanks to their low operational expenses, ETFs are suitable as long-term holdings for ‘buy & hold’ investors too!
Additionally, ETFs are useful to those who are looking for a diversified asset allocation for their portfolio. It’s possible to find an exchange-traded fund that focuses on certain asset classes and has a very low correlation with the rest of your portfolio. For example, you can buy the Gold Shares SPDR ETF, the iShares 20 year Treasury bond ETF and Vanguard’s Global Stock market ETF and Voila! You have created a simple risk-adjusted portfolio in a matter of minutes. ETFs make investing simple.
If you are investing through the Vested platform, along with ETFs you can invest in a curated portfolio of stocks and ETFs which tracks sectors, geographies, and themes through Vests.
We hope this video helped your understanding of ETFs. Let us know your feedback in the comments below. Subscribe to the channel and watch the next video linked on screen.