Excited to get into the world of investing? Exchange-traded funds or ETFs might be your best bet. It offers a chance for those new to investing to gain exposure to the markets of their choice, without needing to invest exorbitant amounts of money.
With ETFs, even a complete newbie can begin buying and selling investment products that could allow you to profit significantly in the long term. It is also a great way to quickly succeed at fundraising for education.
You could put your money into several different asset classes like stocks, bonds, commodities, precious metals, and more. For some, SIPs and Mutual Funds may be a better choice, so we recommend reading more about them as well, before pulling the trigger and making a decision.
With that said, investing carries inherent risks, so only invest what you are prepared to lose. It isn’t a good idea to bet the farm on a single ETF product that could move against you.
However, in the long-term, stock indices like the S&P500, DJI, NIFTY50, and more have been known to trend upwards and be relatively safe bets to invest in.
With that said, it is essential to understand exactly what an ETF is before we can delve into who they are perfect for and what their shortcomings are.
Exchange-traded Funds (ETFs) – What are they & how can you profit from them?
As the name suggests, exchange-traded funds, unlike Mutual Funds, are traded on stock exchanges around the world. Thousands of these ETFs are traded on a day-to-day basis by both professional traders and High-Frequency Trading bots, also known as HFTs.
Does all this sound a little too technical? No need to worry, because we are about to break it down for you and introduce you to the basics, along with the most important aspects that you need to know.
First, we are going to dive deep into who might find ETFs a suitable option for investment.
Who should invest in ETFs?
While anybody above the legal age in their country could invest in an ETF, there are specific types of people that can derive great value from them –
1. Students and beginner investors
For those who are completely new to this space, ETFs can be an excellent way to get started and get a feel for investing your money in different asset classes. ETFs form one of the best child investment options available today.
As a student who has prior commitments and other occupations, ETFs are a powerful tool to make sure that you get a feel for investing early on.
Since they require you to do very little once you have purchased them, you are much more likely to be able to track them and gain valuable experience with minimum effort.
2. Those with full-time commitments
In today’s fast-paced world, not everyone has the precious resource of time to go through all of the nuances of investing.
Especially for those who work a full-time job, and even potentially two jobs at the same time, it can be overwhelming and even impossible to find the time to delve deep into the financial markets and how to profit from them.
In this way, ETFs are a great way for busy professionals and even fully engaged stay-at-home moms to invest their money without investing much of their time.
3. Investors looking to limit their risk in the market
If you have the time to keep track of your investments but simply do not want to overexpose yourself to excessive risk, ETFs are a great way to go about investing.
Mini and micro ETFs allow you to invest small amounts of money that suit your risk appetite, meaning that you only ever need to invest as much as you would feel comfortable with.
This is one of the main reasons that ETFs are so popular worldwide.
Are there any downsides to investing in an ETF?
Investing in ETFs can be a dream come true if you’re looking to expose yourself to minimize expenses. However, as with anything in life, there are pros and cons to investing in an ETF.
It helps to be aware of these downsides especially as a beginner to ETFs so that you can keep yourself better informed and avoid any surprises. Some of the downsides to investing in an ETF are –
1. Transaction costs
As the saying goes, nothing in life is free. This could not be more true when it comes to purchasing and holding an ETF. Depending on which exchange you choose to invest your money with, you could be subject to a whole host of fees, including –
- Order book fees
- Purchase/sale fees
- Time-based holding fees
Over time, these fees can build up to be a significant amount of money, meaning that you will need to take this into account when calculating your final profit or loss.
Fees can eat into your profits drastically, so it is essential to choose a broker or exchange that offers you the best deal when it comes to the added costs of buying and selling ETFs.
2. Tracking errors
At times, ETFs can stray far away from the actual price of the index that they track. This can be for a variety of reasons, including supply and demand fluctuations, liquidity difficulties, and other such factors.
In such cases, you may find that the particular ETF you have invested in trades at a different price to the particular stock, commodity, index, or precious metal that it tracks.
While this is normal and generally accepted in the world of investing, it is a downside to be particularly aware of as you embark on your trading journey with ETFs.
3. Management Fees
Since ETFs are products created by exchanges and financial institutions, they often attract management fees that you are likely to be liable to pay when you purchase them.
These management fees contribute towards the maintenance of the exchange rate and order book liquidity and also incentivize the broker to provide such products for trading.
Keep in mind though, that management fees are in general just a small percentage of the entire amount that you will spend on your purchase.
However, it makes sense to shop around for exchanges that offer reduced management rates, special offers, and bonuses that can help you lessen the amount you need to pay.
FAQs
What is an ETF?
An ETF stands for exchange-traded fund (ETF). One single ETF is a basket of securities that can be bought and sold like mutual funds through a brokerage firm. ETFs track a specific index such as S&P, sector, commodity, or other assets. Much like stocks, ETFs can be traded on the market.
Is an ETF better than a stock?
Investing in an ETF is less risky than investing in a stock, as ETFs are diversified. In the case of ETFs, investors do not control what happens to the portions of the ETFs.
ETFs have a diversified profile of assets, and the risk associated with the investment is reduced significantly. In stocks, the risk attached is higher as the stock price depends entirely upon the company’s performance and other exogenous factors of the world.
Are ETFs good for beginners?
ETFs are generally suitable for beginners as they are inexpensive compared to a few other investment tools. ETFs have a diversified asset profile, reducing the risk associated with the investment significantly.
Conclusion
Exchange-traded funds are perfect for those looking to invest in the stock market for the first time.
It also helps those who have limited knowledge of the stock market and the various intricacies that make up trading and investing.
If you’re someone who is just starting or attempting to experiment with the prices of various stocks, commodities, or precious metals, ETFs are a great way to start.
Just remember, however, to always do your due diligence and research the products you are interested in, and the associated risks and costs that come with them.
