The market is currently going through a volatile run, and it has every body discussing which stocks are doing well and not so great. Times like this in the market is a great opportunity to assess the overall health of your portfolio. Is your portfolio completely down overall? Is there a saving grace investment that is anchoring your portfolio right now? Down market periods are an amazing chance to expand on the strategy that you want to commit to going forward. For me, this opportunity is given through the exchange traded fund.
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This post is not meant to be financial advice. It is simply information that was learned, and is being shared for educational purposes. Investing comes with significant risk, and you should consult with a financial professional with any investment decision.
What are exchange traded funds?
Exchange traded funds are so much fun because they add a little extra magic to your investments. With all of the talk about stocks, I feel that ETFs are glossed over a little bit. What is an ETF anyway? According to investopedia.com an exchange traded fund “is a type of security that tracks an index, sector, commodity, or other asset, but which can be purchased or sold on a stock exchange the same way a regular stock can.” This sets them apart from investments like index funds that are traded once per day, at the end of the market day. ETFs are a dynamic investment because they do not always have to track an index like the S&P500. They can house any type of “stock class.”
For example: you can have an ETF that houses tech stocks, or one that houses commodities, or even finance investments. Exchange traded funds basically work as a basket of stocks and/or investments that give you reach into more than one investment at once. So now that we know what an ETF is, why are they such a big deal?
Why are exchange traded funds important?
These particular investments are a great way to set your portfolio ahead of the market curve if you act wisely and stay the course. I say this because exchange traded funds have the benefits of index funds, but the flexibility of single traded stocks. What do I mean by that?
- ETFs are able to be traded at anytime during the stock market trading day, whereas index funds are traded once per day.
- This allows you to hop in and out of a particular ETF if that is what you want or need to do. Index funds make you wait until the end of the day when everyone’s trades are happening at the same time.
- Exchange traded funds provide your portfolio with diversification that single stocks are not able to do. This is possible because some exchange traded funds follow stock market indexes, or a certain industry. This will make diversifying your portfolio faster and easier than buying multiple stocks from different industries.
- ETFs seem to provide a great bang for your buck because the good ones have very low expense ratios. According to Investopedia.com an expense ratio “measures how much of a fund’s assets are used for administrative and other operating expenses.” They also translate to the fees that the investor is inevitably charged. A good example of an ETF with a low expense ratio is the Vanguard 500 index fund ETF (VOO). it has an expense ratio of 0.03%. Delicious!
This post was meant to highlight the ETF. I hope that you now understand what an exchange traded fund is, how they are bought in the stock market, and why they are important. As a short recap:
- ETFs encompass multiple investments, follows an index, or a certain industry, providing great diversification.
- They can be traded with the same frequency as single stocks.
- These funds often have lower expense ratios than index funds, making them give more for your money in some cases.