ETFs Trading

An exchange-traded fund is a new type of investment fund which serves as a basket of securities that can be traded easily on stock exchanges. To some extent, ETFs are similar to mutual funds. The best thing about ETFs is that they can be bought or sold at any time of the day. The idea behind the creation of ETFs was to help those traders who become double-minded while selecting any single asset to invest in. ETFs are an easy choice for those confused traders as they contain all types of investments.

From Where to Buy ETFs?

ETFs can be bought and sold through online brokerage platforms quite easily. Brokers allow their clients to trade ETF shares the same as they trade shares of stocks. If you are already trading, then you just need to shift your investment from one asset to another, but if it’s your first time, then you need to find a reliable broker first. Some good brokers are offering screening tools as well, which are used to sort through the hundreds of ETF offerings. ETFs can be differentiated from each other based on the following criteria.

Volume: If you are unable to choose between various ETFs, then simply compare their trading volume as it will tell you about their popularity. The funds with higher trading volume will prove easier for you to trade.

Expenses: Try to select a fund with a low expense ratio so that the administrative costs remain minimum.

Performance: Past performance of ETFs is also a good metric to predict their future. Various brokerage platforms keep a record of all assets that traders can use for their good.

Commissions: Some commission-free ETFs are also available in the market that can be traded without any fee. A beginner-level trader can utilize these ETFs.

ETFs Types

There are various types of ETFs available in the stock exchanges, and traders choose according to their investment focus. Some of the common ETF types are the following.

  • Diversified Passive Equities:

This type of ETFs are created to replicate the execution of famous shares market benchmarks like the Dow Jones Average, S&P 500, and the Europe Australasia Far East. Index-based ETFs tend to tailgate their execution benchmarks as closely as possible.

  • Niche Passive Equities: 

This type of ETFs copy the subsets of the popular S&P 500 and other small companies that offer focused exposure for managing their portfolios. Usually, these funds for niche portfolios are created from the same shares, which are used to calculate their relative indexes and exposure.

  • Active Equities: 

These ETFs enable the managers to act on their own decisions and choices while selecting investments instead of following some benchmark indexes. Active ETFs are somehow risky but have the potential which can outperform the market benchmarks.

  • Fixed-Profit ETFs: 

This type of ETFs stress bonds and not stocks. The majority of fixed-profit ETFs are managed actively. They have low turnover but very solid and stable portfolios.

Diversification in ETFs

ETFs not just provide vertical diversification (stocks, bonds, etc.) but also allow traders to diversify across horizontals. Every trader cannot buy a whole basket of securities, but it provides the benefits equally to every portfolio with just a click of a button. Ultimately, diversification safeguards portfolios against high volatility. ETFs are already very diversified, so they provide balance to portfolios. It means that if one market faces a bad year, your earnings wouldn’t be affected much, and common sense also supports this fact.

Advantages of Exchange-Traded Funds

  • ETFs have a relatively lower average cost as it is difficult for an individual to buy all the stocks of an EFT alone.
  • Compared to other investments, ETFs have relatively lower expense ratios and brokerage commissions.
  • ETFs, bring flexibility to the portfolio, which encourages frequent trading and lowers risks through diversification.
  • ETFs provide tax efficiency, which gives them a clear edge over mutual funds.