An ETF is an Exchange Traded Fund or investment fund traded on stock exchanges. You can buy them just like any other company's shares, and you can also buy them through your banking account. But, unlike companies that own producing assets - like oil, mining, or real estate - ETFs are usually just baskets of companies in different sectors. The share price fluctuates based on the performance of the individual stocks in the index, so it's not a "buy-and-hold" investment like shares in a company with assets that produce revenues and profits. ETFs invest in stock indexes, market indices, and commodity and currency indices.
ETF investments are generally considered very tax efficient as long-term capital gains - both short-term and long-term - are tax deferred until investors sell their interests. In addition, dividends are usually treated as a form of 'long-term gain,' which can further reduce your tax liability in the long term. ETFs are also very liquid and suitable for intra-day trading compared with other investments.
ETFs can also be an excellent way to diversify your portfolio. Sold using so-called asset allocation, the ETF is often advised when it comes to choosing the suitable strategic investment for your money. An ETF allows you to choose from a wide range of asset classes, supported by financial and regulatory professionals who are charged with keeping track of what's in their portfolios while monitoring the price movements of every share traded. Investors don't have to worry about whether the investment will be profitable in the future.
There are many types of ETFs selling a variety of investments, including oil and gas ETFs, gold ETFs, and even ones focused on currencies. All ETFs aim to produce consistent returns, but individual funds' returns can differ. ETFs also tend to be quite volatile. While they may not mirror the ups and downs of the stock exchanges, they don't always hold up well in falling markets either. Investors also need to consider that most brokers will charge you commission fees on every transaction you make.
Some of the more popular types of ETFs include the Market Index Fund, which comprises shares from different sectors. Market index funds balance the risk and reward trade-off by investing in growth and defensive stock. That way, they can achieve higher returns than low-risk funds but still lower than high-risk stock markets. A market index fund is an excellent way for investors to manage their money, and research has shown that it can be more profitable than other investment strategies over time.
Sector funds are another type of ETF and are made up of shares from different sectors within the market. These 'sub-indexes' can also be used for other investment types as well. For example, buying into a gold sector fund means that you will get a cut of the profits from gold mines, but also those that mine silver or copper. If you want to invest in your favorite sector, especially when it's doing well, then this type of ETF is a great way to go.
Commodity ETFs invest in commodities, and these include investments in energy, agriculture, and metals. The kind of stock traded here is far less volatile than that of ordinary stocks and others. Some of the most famous examples include commodities, such as oil or gold ETFs.
