Exchange-traded funds (ETFs) are a basket of securities that trade on an exchange like a stock does.
ETFs are becoming popular because they help investors gain a simultaneous exposure in various securities.
It is intriguing for investors to know more about ETF investing.
This article highlights what ETFs are and relevant points to consider before investing in them:
What is an Exchange-Traded Fund?
An exchange-traded fund is a basket of securities. ETFs are listed on stock markets. Investors can buy and sell them during the trading hours.
They invest in various investment instruments. Investors can choose ETFs based on their financial requirements.
Let’s take a look at different types of ETFs –
- Market ETFs
Market ETFs are one of the most common ETFs. These ETFs track a specific index. Market ETFs allow investors to invest in all the companies listed in the specific index.
- Dividend ETFs
These ETFs invest in stocks that pay dividend. Therefore, such ETFs can help investors accumulate substantial funds.
There are various dividend ETFs, and they are based on the dividend growth’s performance or maximising current yield. The returns vary depending on the type of dividend ETF. Investors can pick a dividend ETF that suits their portfolio.
- Sector ETFs
Sector ETFs invest in a specific sector. While market ETFs invest in an index, sector ETFs invest in stocks of a specific sector, such as pharmaceuticals.
In case of market ETFs, the profit of investors might reduce due to a few underperforming stocks. However, if a sector has great performance, then this sector’s ETF investors can get higher returns.
- Bond ETFs
Primarily, there are two types of bond ETFs- broad-market bond ETFs and bond sector ETFs. Broad-market bond ETFs invest in the entire market. Bond sector ETFs invest in bonds, such as corporate debt, treasury bonds, etc.
Investors should keep in mind the aim of the fund. It can be on maturity, or it might roll over the bonds that are maturing and buy new ones.
- Commodity ETFs
These ETFs invest in the commodities like gold, etc. Such ETFs are a great option for investors who want to make their portfolio stable by investing in various securities.
- Currency ETFs
These ETFs can help investors earn returns based on the movements in foreign currency. Currency ETFs are beneficial for investors who want to hedge their investments.
Things to Consider When Investing in ETFs
While ETFs are great for earning returns, there are some things that people should consider when investing in them. One of the most important factors when investing in an ETF is the sector or index it invests in.
Investors should check the holdings of the ETF before selecting one. Check how the money is allocated in the securities.
ETFs are a great option for investors who want to keep their portfolios stable while earning good returns. Keep the above things in mind when investing in ETFs.