ETFs For Beginners: What are ETFs?

What are ETF’s (exchange traded funds) and why are they a popular option for the individual investor? ETFs perform somewhat similar to a mutual fund because they are made up of many different securities, however, exchange traded funds trade like stocks so you can buy and sell them much more simply than you can with a mutual fund. Many ETFs are based on index funds such as the S&P 500, but you can get them in a variety of other shapes and sizes as well

ETFs are pretty popular with beginner investors as well. For beginners, getting involved in the market can be confusing because you may not have a lot of money to invest, you want to diversify your portfolio and you are (usually) completely unsure of which stock, or stocks, to buy. It is safe to say that there are not many people that can pick out winning individual stocks on a regular basis, which is why mutual funds became so popular, but mutual fund fees can get out of hand if you dont know what you are doing. By investing in an ETF, you get the advantages of mutual funds in that it is easier to diversify your portfolio. and you do not have to determine which individual stocks to buy.

The bonus is that an ETF has many of the same characteristics of a mutual fund. It gives you the variety and the diversity of a portfolio that many people investing in the market are looking for. It will (typically) also have much less risk than picking individual stocks that may not perform. You can still invest in some of the sectors that you are interested in, but by using the ETF you are investing in the sector index as opposed to the individual stock. This will help to protect you if one particular company is not performing well, but this sector as a whole may be performing very well.

The ETF’s also have several other benefits over individual stock picking as well as mutual funds. Since you are only performing one transaction, you will not have some of the fees associated with performing a variety of transactions. This will not only save you some money, but it will also save you time as well. It is also considered that the ETF will have the ability to perform slightly better than mutual funds. You can also expect to not have to incur as many fees as a mutual fund will incur. A mutual fund that is actively managed may have more than 2% worth of fees. The ETF fees can be between .25% and .75%. As you can see, this will help to reduce the amount of fees that you have to pay.

Investing in ETF’s also allows many more people to participate. There is normally some type of minimum requirements to invest in a mutual fund. Sometimes a mutual fund may require a minimum of $1,000 or more, which in this economy is not always easy for the typical investor to come by. To buy an ETF, can get started for a much cheaper dollar amount. Since the ETF does not have nearly as much trading activity as a mutual fund, you should also expect to pay less in taxes, although you should always verify this with your accountant or financial planner since everyones taxes are different.

If you are interested in investing in ETFs there are tons of options that you can choose from, and many investment firms will be able to help you get started and most online brokers like Tradeking. ETrade and OptionsHouse charge the same commission for an ETF that they do for a stock, which is another money saver. Just visit your online trading accounts ETF page or you can check them out for free at a site like Yahoo finance to get started.

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