Five Things You Need To Know Before Investing in ETFs

ETFs, or exchange-traded funds, are among the most popular investment tools for newbie investors. Much like mutual funds. they consist of a group of stocks or commodities based on an existing index, such as the S&P 500 or NASDAQ. They may also consist of a group of stocks in the same general industry, such as the Global X Fishing Industry ETF, which contains holdings in twenty fishing-related companies.

ETFs Explained

ETFs allow investors to diversify their holdings without having to buy mutual fund shares. Mutual funds typically cost a lot to trade, and the fund managers collect a fee when you sell. You may have a sense that a particular industry is rising but dont quite know which company to invest in. ETFs let you do so cheaply and easily. You may also wish to invest in diversified ETFs such as those based on a stock index.

ETFs can slice up stock indices in several different ways; for instance, there are low volatility ETFs, high-gain ETFs and growth- or value- oriented ETFs. Because ETFs are so versatile yet ultimately inexpensive and uncomplicated, many beginning traders choose them for their first investments.

Of course, there are several things to keep in mind before investing in ETFs. Like any investment, ETF trading takes a certain level of skill, understanding and wisdom if you want to make money. Read on for the five most crucial things you need to know.

1. Buy and Sell the News Markets change depending on news stories or releases of economic data. You should be aware of the events in the world and buy or sell your ETFs accordingly. For instance, if you invest in oil-related ETFs, look for news stories about Middle East turmoil or rising industrial growth to buy, and look to recessionary trends or new oil field discoveries to sell.

2. Pay Attention to the Details One common concern for ETF investors is how one ETF may trade in the same industry as another but do better or worse. This occurs because ETFs are weighted differently. Some are geared toward looking at the whole industry, while others focus on high-volatility stocks to increase the chance of high gains. Read everything you can about an ETF before investing.

3. Buy Popular ETFs For Better Prices - The more often an ETF trades, the narrower your bid-ask spread will be and the less money will be taken out of your trading profits. If you truly believe in a particular ETF is worth spending extra money on, then do so, but calculate the bid/ask spread before making the purchase so you can see how much the fund has to rise to be profitable.

4. Consider Bonds in Addition to Stocks There are as many bond derivative ETFs are there are stock-based funds. Before ETFs, you had to buy bonds one by one, and if a company or municipal organization defaulted, you would lose your entire investment. ETFs allow you to affordably invest in dozens of different bonds at once, so even if one or two default, you will still receive your interest payout from the others. Bonds are considered more conservative and reliable than stocks, making their ETFs correspondingly safer.

5. Understand Taxes and ETFs — ETFs are subject to varying capital gains taxes. For instance, municipal bond ETFs provide tax-free returns, while some commodity ETFs are set up as partnerships between investors, making the tax that much greater. Do your research to figure out your tax liabilities before you buy.