What are ETFs and how to invest in them
New to trading? You might be asking yourself “what are ETFs”? Here, we take a look at these financial products to give you some idea of how they work, and how they might fit into an investment or trading strategy.
What are ETFS?
Breaking down ETFs
ETF stands for Exchange Traded Fund. They are a form of investment that combine the features of funds and equities.
ETFs are like other types of fund in that they are made up of a group of assets. These might be shares from a certain sector, commodities, bonds, or a mixture of different asset classes. The assets inside an exchange traded fund help track the performance of the fund’s underlying market as closely as possible.
Unlike other funds, exchange traded funds are listed on exchanges as their name suggests.
Some ETFs contain thousands of stocks; others not so much. But, by investing in an ETF, you can gain exposure to an entire sector with a single trade, instead of investing in individual stocks. For example, the ARK ETF is gathering together companies related to space travel and exploration.
Oil ETFs, for example, will likely contain oil producers, but they can also include companies involved in other aspects of oil, such as oilfield service providers, equipment manufacturers, transportation firms and so on. Of course, oil ETFs may also include different types of oil assets, like WTI or Brent crude oil futures, together in a single fund.
Benefits of exchange traded funds
Investors use ETFs for numerous reasons as they do offer some key investment benefits.
- Transparency – The assets inside an exchange traded fund are available to see, so you’re not closed off from what you’re investing in. All of them are publicly traded assets available on exchanges. You know what you’re getting in an ETF. Their prices are displayed too via exchanges, making them very accessible.
- Diversity – Successful investors diversify their portfolios to protect against risk. ETF shares allow them to hedge against negative movements in single sectors or markets, as this type of instrument offers access to multiple markets in a single trade.
- Variety – The variety of options available for ETF options is nearly as diverse as the number of individual stocks available on exchanges – ideal for diversification.
Types of ETF
Here is a list of the most commonly occurring exchange traded funds available for investors
- Commodity ETFs – These group together different commodities, with popular funds including oil ETFs, gold, and other metals.
- Currency ETFs – Used by forex investors to invest in a variety of currencies such as USD, EUR, or GBP.
- Industry ETFs – Like the aforementioned ARK Space ETF, these group together stocks in a specific industry such as tech, banking, or oil & gas. They may take a wider view of their industry, representing companies working across all sectors, like tech manufacturers, component suppliers, technology retailers, and so on.
- Bond ETFs – These include government bonds, corporate bonds, and US municipal bonds, covering state and local bonds.
- Inverse ETFs – An inverse exchange traded fund attempts to earn gains from stock declines by shorting stocks (selling stocks, expecting a decline in price, and purchasing the stock again at a lower price).
How to invest in ETFs
Currently, there are over 70 different exchange traded funds to choose from on our Marketsx trading platform. We’ve laid how some key steps below on how to invest in ETFs.
- Choose your area of interest – What are you looking to invest in? Have any markets caught your eye? Maybe you want to capitalise on the recent cryptocurrency boom, or invest in renewable energy? Set out which sectors you wish to invest in.
- Trading or investing – Are looking to trade or invest in ETFs? There is a key difference here. Investing is where you would buy into the fund, assigning what level of capital you want to invest in each of the fund’s assets. Trading would mean you do not own any of the underlying assets in the fund. Instead, you would be trading on underlying price movements, like you would a stock CFD. Trading is done via Marketsx platform.
- Set your budget – Trading and investing contains inherent risks. While there is substantial potential to make profits, you could also make substantial losses too. Only set an investment budget you are comfortable with. Never commit any capital you cannot afford to lose. You can also add stops and limits to your Marketsx or Share Dealing account.
- Open & monitor your positions – Once you’ve decided, you’re ready to open your positions. Be sure to monitor your ETFs for price movements and so on, to mitigate your risk and avoid any losses.
Remember: trading and investing in ETFs, like any financial product, is risky. You can lose money. Please be ensure you know of all the risks and mitigate them accordingly when investing or trading in exchange traded funds.