Fungible and wholly negotiable, a security is a financial tool that holds value. It is a marker of ownership within a publicly-traded corporation through stocks, a creditor connection with the government or a private entity through bonds, or an option that stands for ownership rights. One such security is an Exchange Traded Fund or simply, ETF.
What is ETF?
ETF is a security classification made up of a set of collection of securities. Stocks and commodities fall under this type. This security, while can be used to invest in several industries and techniques, track underlying assets.
ETFs and Mutual Funds share numerous similarities. One obvious departure is that an ETF share is set on exchanges much like an ordinary stock. However, it departs from a stock given that it tracks multiple assets, not just one.
As this is the case, an ETF can have hundreds or even thousands of stocks from several industries. But do note that it can also be isolated to one specific industry.
There are number of ETF classifications:
- Bond ETFs – includes government, corporate, and municipal bonds.
- Commodity ETFs – refers to commodity investments such as crude oil and gold.
- Currency ETFs – invest in foreign currencies such as the Euro and the Canadian dollar.
- Industry ETFs – track a particular industry such as technology, banking, or the oil and gas sector.
- Inverse ETFs – these attempt to earn gains from stock declines by shorting stocks. Shorting is selling a stock, expecting a decline in value, and repurchasing it at a lower price.
How to use ETF
Being an innovation in investing, ETFs take the best of index mutual funds and the versatility of securities. It is diverse, low in expense ratio, and wholly efficient with taxes.
There are several ways by which you can make the best out of ETFs:
- Active Trading
Simply put, ETFs are the perfect way to move more inside and outside the whole market or a particular industry.
- Index Investing
ETFs may be used as an instrument of investment in broad market indexes. On the equity front, there are ETFs that reflect major market indexes, Nasdaq 100 and S&P 500 being one of the few.
- Long-Term Portfolio Management
Through ETFs you can opt for active management strategy. ETFs can help an investor to actively manage their holdings.
- Wrap Investing
If fee-based investments are what investors are looking for, then ETFs would also be the best to use.
With all these said, it is apparent that ETFs are convenient in that these are entirely efficient in taxes and cost. They can easily be understood by even the most laymen of investors.