If you currently have investments in mutual funds and want more control over your money without having to get into the tedious analysis of individual stocks or bonds, ETFs may be right for you. ETFs have been growing in popularity and numbers over the past few years due largely to their unique advantages over mutual funds and diversification opportunities they present.
What is an ETF?
An ETF, or Exchange Traded Fund, is a security that tracks an index, commodity, or a basket of assets, like an index fund but trades like a stock on an exchange. ETFs can provide the diversification of a mutual fund and the liquidity of a stock. Most ETFs have lower expense ratios than the average mutual fund, but you will have to pay a trade commission to a broker when you buy and sell them. With over 1000 ETFs to choose from the investment opportunities are diverse.
Types of ETFs
Though the number of ETFs are no where near that of mutual funds, some ETFs offer investing opportunities that mutual funds just can’t provide, individual commodities for example. Because of this, ETFs have become very popular when trying to investment in an asset that may be unavailable to the average investor.
A good example of this is the gold ETF, SPDR Gold Shares (NYSE: GLD), is 100% invested in physical gold bullion. As an individual investor you could buy the gold bullion and pay a storage fee for it, or you could buy the gold ETF at a fraction of the cost.
Gold ETFs certainly aren’t the only opportunities. You can pretty much find an ETF for almost any sector of the market. ETFs can cover individual commodities like gold or oil, a sector of the market like healthcare or technology, emerging markets like the pacific rim, a specific country like China or Peru, as well as a number of similar mutual fund categories.
ETFs have opened up markets and investment opportunities that the average investor didn’t have access to only a few years ago.
A Word of Caution
Not all ETFs are good investment options for the average investor. There are leveraged and inverse ETFs that provide double or triple an index’s return. They sound like great investment options but are used primarily by professional traders. These types of ETFs were designed to achieve their objectives on a daily basis and are not meant as long term investments. Because of this the SEC has put out an alert regarding these leveraged and inverse ETFs.
The best way to protect yourself is to educate yourself. Thoroughly read the objectives of any ETFs you’re considering and make sure they fit with your investment strategy. Start with ETFs in similar categories as any mutual funds you might be invested in. From there you can move into other sectors on your way to actively managing your money.