What are exchange traded funds (ETFs)

What are exchange traded funds (ETFs)

An exchange traded fund, or ETF, is a basket of investments like stocks or bonds. ETFs let you invest in lots of securities all at once and they often have lower fees than other types of funds. Investors buy shares of ETFs, and the money is used to invest according to a certain objective. For example, if you buy an S&P 500 ETF, your money will be invested in the 500 companies in that index. But like any financial product, ETFs aren’t a one-size-fits-all solution. Evaluate them on their own merits, including management costs and commission fees (if any), how easily you can buy or sell them, and their investment quality.

How do ETFs work?

The fund provider owns the underlying assets, designs a fund to track their performance and then sells shares in that fund to investors. Shareholders own a portion of an ETF, but they do not own the underlying assets in the fund. Investors may get dividend payments, or reinvestments. ETF’s trade at market-determined prices that usually differ from that asset.

Pros and Cons of Investing in ETFs

Pros:
– They provide exposure to a variety of assets at minimal prices.
– It takes guessing out of investing and takes pressure away from putting your eggs in one basket and helps match market performance over a period.
– They are liquid and easy to buy and sell.
Cons
– Since ETFs own a large variety of stocks and holdings, they do not have quite as much growth potential (capital growth) as buying direct shares.
– ETFs are not free and do cost money. Management fees will need to be paid as opposed to buying direct shares on your own where you do not need to pay any management fees.

As such ETF’s are a worthy consideration to own in a diversified portfolio if suited to your needs. Reading a product disclosure statement (PDS) will contain all the information you need to know about an ETF such as its holdings, overall objectives, risks associated, and costs incurred. If you want to discuss these investments in detail or have any other questions, you may also seek financial advice to ensure it aligns with your individual needs and objectives.