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What You Need to Know About Investing in ETFs

- 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:

Quotes of the Day:

  • "When everything seems to be going against you, remember that the airplane takes off against the wind, not with it". - Henry Ford
  • “Your success in investing will depend in part on your character and guts and in part on your ability to realize, at the height of ebullience and the depth of despair alike, that this too, shall pass.” - Jack Bogle
  • "Rich people makes money when the stock market goes up, rich people makes even more money when the stock market goes down". - Unknown
  • "Investors should purchase stocks like they purchase groceries, not like they purchase perfume". – Ben Graham
  • "There comes a point when you stand in the rain and you get so wet, you can’t get any wetter". - Unknown
  • "Many people rush into the game of investing thinking they are predators. When they get to the middle of the game, they then realize they are the prey and try to escape but it will be too late. Only the preys with a well defined exit strategy will escape, the rest will be slaughtered by the real predators". - Ajaero Tony Martins
  • “Thousands of experts study overbought indicators, head-and-shoulder patterns, put-call ratios, the Fed’s policy on money supply…and they can’t predict markets with any useful consistency, any more than the gizzard squeezers could tell the Roman emperors when the Huns would attack.” - Peter Lynch
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