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...

  • The south sea bubble of the 18th century, which saw the south sea company's stock rise and fall dramatically, is an early example of corporate fraud influencing stock prices?
  • While the annualized return gives a smoothed percentage return over a period, the compounded annual growth rate (CAGR) gives a more accurate picture of investment growth?
  • Studying a company's 'short interest ratio' can offer insights into market sentiment, with a higher ratio potentially indicating bearishness?
  • Thematic investing involves picking stocks based on broader macro or societal trends, like aging populations or renewable energy adoption?
  • The allure of asymmetric returns can sometimes lead to bubbles in growth sectors, where valuations become detached from underlying fundamentals?

Quotes of the Day:

  • "Investing is not a get-rich-quick scheme, it's a get-rich-slowly scheme." - John Neff
  • "Investing is not about following the crowd, it's about thinking for yourself." - Michael Steinhardt
  • "The trend is your friend except at the end when it bends." - Martin Zweig
  • "The key to successful investing is having a long-term perspective." - Louis Bacon
  • "The stock market is not a casino, but it can be if you treat it that way." - Thomas Rowe Price Jr.

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