What You Need to Know About Investing in ETFs

By TraderHQ Staff

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Exchange-traded funds or ETFs are investment funds that trade just like stocks on stock exchanges and offer tax benefits, low costs and easy diversification through a single ETF.

Many ETFs track an index like the S&P 500 and investors favor them due to low costs, tax efficiency and easy diversification. They can be traded much like stocks such as, options, short-selling, limit orders etc. Today, over 2000 ETF products exist in every market sector, and trading strategy.

Benefits of ETFs:

  1. Low Costs: – Most ETFs are not activly managed and thus have low costs.
  2. Stock Like Trading – ETFs trade just like stocks, so you can buy and sell at anytime during the trading day including stop and limit orders.
  3. Tax efficient – ETFs taxes are typically low as they generate relatively low capital gains.
  4. Easy Diversification – ETFs provide diverse exposure to indicies, sectors, bonds and commodities.

Types of ETFs:

  • Index ETFs
  • Stock ETFs
  • Sector ETFs
  • Style Based ETFs
  • Bond ETFs
  • Commodity ETFs
  • Currency ETFs
  • Dividend ETFs
  • Actively Managed ETFs
  • Inverse ETFs
  • Leveraged ETFs

How do ETFs compare to Mutual Funds?

ETFs offer a lower expense ratio compared to Mutual funds making the overall fees much lower for owning and selling ETFs.

ETFs are more tax efficient than mutual funds due to how capital gains get distributed to mutual fund shareholders.

ETFs trade like stocks and can be bought and sold at any time while mutual funds can only do so at the end of the trading day. ETFs can trade with options, puts, calls, limit and stop lost orders.

Best ETFs for Most Investors:

  1. Vanguard S&P 500 ETF (VOO)
  2. Fidelity ZERO Total Market Index Fund (FZROX)
  3. SPDF S&P 500 ETF (SPY)
  4. Russell 2000 ETF (IWM)
  5. Schwab U.S. Dividend Equity ETF (SCHD)
  6. SPDR Gold Trust (GLD)
  7. Invesco QQQ (QQQ)
  8. Vanguard FTSE Developed Markets (VEA)

ETF company's:

Did you know that...

  • Consumer loan providers, like credit card companies, might see higher profit margins due to increased interest earnings in a rising rate environment?
  • 'naked short selling', the selling of a security without borrowing it or ensuring that it can be borrowed, is illegal in many markets due to its potential to manipulate stock prices?
  • Stock screeners can help investors filter through thousands of stocks based on specific criteria, such as dividend yields, p/e ratios, or debt levels?
  • The "dogs of the dow" strategy involves buying the 10 highest dividend-yielding stocks of the dow jones industrial average at the start of each year?
  • Frequently trading in and out of positions can lead to higher transaction costs and potential tax consequences, which can erode returns?

Quotes of the Day:

  • "The best investment you can make is in yourself." - John Paulson
  • "The stock market is a device for transferring money from the impatient to the patient." - Donald Yacktman
  • "The best investors are those who are able to control their emotions and think independently." - Seth Klarman
  • "The best way to get rich is to be a little bit lucky and a little bit smart." - Charlie Munger
  • "Investing is about understanding your risk tolerance and finding investments that are likely to generate returns that meet your goals." - John Paulson

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