A relatively new way of trading in the stock market is through ETFs or Exchange Traded Funds.
ETFs are not the most straight forward trading or investment mechanism, and they do take some time to understand, but the benefits of trading exchange traded funds are far greater in many respects than trading regular stocks and mutual funds.
Exchange traded funds are investment funds that are traded in stock exchanges just like stocks are. But as stocks represent a single share of ownership in a publicly traded company, an ETF represents a share of a basket of stocks of various companies, or commodities and bonds.
ETFs used to be mostly index fund driven up till 2008, when the Securities and Exchange Commission (SEC) decided to allow the active management of ETFs. Sound like mutual funds? They are, except exchange traded funds reflect values very close to the true net asset value of its underlying securities throughout the day rather than settling at a given value during the end of the day like mutual funds do.
The simplest way I can explain an ETF is that they are mutual funds that can be traded throughout the day like stocks. More technically speaking, an ETF is a pool of securities that are available for sale to investors that can be bought and sold throughout the day just like stocks.
Here are just a handful of benefits trading ETFs.
This is not a comprehensive list by any means. ETFs take some time to understand, and can be an investment worthwhile your time given its benefits. It is one way to keep more of your hard earned money and maximize your return on investment over the long haul.
One downside that I can think of is because exchange traded funds are low to no commission and they can be traded over the counter daily just like stocks, many are day trading these easily multiple times a day. It is easy to get carried away with this activity and I know that I don’t need to remind you of where most day traders end up?
I personally do not day trade anymore because among other reasons, I don’t understand how to profit from the short term nature of ETF investing, nor do I have the time and appetite for the headaches that accompany day trading.
Just as I do with mutual funds, I buy and hold my ETFs over a long term. And because there is no commission involved in the ETFs I am invested in, I can afford to buy a small amount each month, therefore dollar cost averaging my ETF investment portfolio without incurring any fees.
This benefits me both in the short and long term. Doing this over time can expedite my portfolio’s growth by 12 or more years compared to someone who invests the same amount over the same time horizon but pays commission on their trades.
Exchange traded funds have become a fairly routine form of trading and investing for many today. That said, I recommend spending some time learning about them in depth before taking the dive.
Have you incorporated ETFs in your investment mix? Why or why not? What do you think about ETFs in general?
Here is Wiki’s definition of exchange traded funds.