Advantages and Disadvantages of investing in ETFs?
What is an Exchange-Traded Fund (ETFs)?
An exchange-traded fund (ETFs) is a type of pooled investment security that operates much like a mutual fund. Typically, ETFs will track a particular index, sector, commodity, or other asset, but unlike mutual funds, ETFs can be purchased or sold on a stock exchange the same way that a regular stock can. An ETF can be structured to track anything from the price of an individual commodity to a large and diverse collection of securities. ETFs can even be structured to track specific investment strategies.
How is ETFs works?
An ETFs is called an exchange-traded fund because it’s traded on an exchange just like stocks are. The price of an ETF’s shares will change throughout the trading day as the shares are bought and sold on the market. This is unlike mutual funds, which are not traded on an exchange, and which trade only once per day after the markets close. Additionally, ETFs tend to be more cost-effective and more liquid compared to mutual funds.
An ETF is a type of fund that holds multiple underlying assets, rather than only one like a stock does. Because there are multiple assets within an ETF, they can be a popular choice for diversification. ETFs can thus contain many types of investments, including stocks, commodities, bonds, or a mixture of investment types. An ETF can own hundreds or thousands of stocks across various industries, or it could be isolated to one particular industry or sector. For example, banking-focused ETFs would contain stocks of various banks across the industry.
Advantages and Disadvantages of ETFs
- Access to many stocks across various industries
- Low expense ratios
- Risk management through diversification
- ETFs exist that focus on targeted industries
- Actively managed ETFs have higher fees
- Single-industry-focused ETFs limit diversification
- Lack of liquidity hinders transactions
- Higher fee than investing in stocks
Source: Investopia, Robinhood