What is an ETF?

ETFs, or Exchange Traded Funds, are investment vehicles that, like mutual funds, allow investors to purchase a portfolio of securities or other assets.

ETFs offer equities, fixed income, commodity, and currency exposure, as well as multi-asset, leveraged and inverse, and alternative investment techniques.

Their adaptability has grown in popularity with investors in recent years.

ETFs, unlike mutual funds, can be exchanged like individual equities on stock markets. This makes them extremely liquid and allows investors to buy and sell them throughout the day and the price of an ETF may change during this time. However, because most ETF trading volume is low, the offer spread may be greater, implying that investors may not receive the price they intended. Before acquiring an ETF, investors can look at its typical trading volume to see if it will fulfil their demands.

Most ETFs’ investment goal is to mirror the returns of a specific index before fees and expenses, resulting in a portfolio management style known as passive management. A limited subset of ETFs, on the other hand, are actively managed by a portfolio manager, allowing for human judgements to select holdings and weights while nevertheless revealing their portfolio holdings on a daily basis.

Whenever you purchase stock of an ETF, you’re actually buying stock of a portfolio that’s structured to replicate the yield and return of its market index.

Many ETFs provide diversification since they hold hundreds or thousands of equities across asset groups. However, other ETFs are tightly targeted, focusing on a certain market sector or a subset of an asset class.

Another key point to consider is that although ETFs generally have lower costs compared to some other investments, such as mutual funds, they’re not free. ETFs are traded on an exchange like a stock, so investors may have to pay a real or virtual broker to facilitate the trade.

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