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ETF Definition: A Closer look at Exchange-Traded Funds

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    Exchange-traded funds have changed the face of investing in the US. In the ten years since the financial crash, ETFs have grown from 530 billion to 4 trillion dollars. They’re popular with investors for several reasons.

    If you’re looking for an easy way to diversify your investments, consider exchange-traded funds. Here’s an ETF definition that will help you see how these versatile funds can help you achieve your goals.

    An Easy ETF Definition

    An exchange-traded fund (ETF) is a fund that holds a collection of different assets. You can buy and sell shares in the fund on the stock exchange. They are easy to trade, and they’re a way to invest in many different companies at once.

    An ETF can hold assets like stocks, bonds, currencies, and commodities. The majority of these funds track a market index like the NASDAQ or S&P100, but there are many other types of ETFs to choose from. Holding ETFs is a great strategy for investments.

    As an ETF investor, you don’t own the underlying securities directly. You are entitled to part of the profits and have a claim on the residual value if the fund liquidates.

    ETFs Improve Diversification

    An ETF is a perfect investment to increase diversification. They remove the complication of holding individual stocks in your portfolio. One of the main benefits of ETFs is how you can reduce the risk in your portfolio.

    If you tried to mimic the diversification of an ETF, it would cost a lot of money and time. They spread your investments across a variety of sectors and industries.

    Your investment manager can help you choose the right ETFs to help balance out your holdings. They’re an excellent tool for cash flow planning now and into your retirement.

    Transparency Is Increased

    ETFs publish their holdings daily, letting investors know exactly what they are investing in. Mutual funds and other institutional investors don’t disclose their holdings as often.

    An investor might want to check that the fund is following its strategy. They might be concerned about green investing or avoiding investments in specific industries or sectors. Transparency improves an investor’s awareness.

    Other Advantages of ETFs

    These investments are more tax efficient as you only pay capital gains tax when you sell your ETF shares. With a mutual fund, you may owe tax on gains more often as the fund manages its holdings. With an ETF, an investor can control when to realize profits, which can help when setting investment goals.

    With an ETF, you will experience lower broker fees than you would pay if you traded individual shares in companies in different sectors. These funds tend to be more liquid than mutual funds as they trade during the day like stocks. The required investment is much lower.

    Types of ETFs

    Your individual investment strategy will determine which type of ETF is a good investment for you. A professional investment manager will evaluate your investment timeline and look at your portfolio. They are a great ETF investing resource, and they will help you select ETFs to build wealth.

    When you ask what is an ETF, there are many answers. Here are some of the many options to choose from when you’re looking at ETFs. 

    Market or Index Exchange-Traded Funds

    These ETFs are designed to track a well-known index such as the S&P 500. They may cover specific sectors, classes of stocks, or foreign or emerging markets.

    Bond Exchange-Traded Funds

    These funds are focused on bonds or fixed income securities and can target specific bond types such as high-yield or corporate bonds. They usually hold bonds with different maturity dates, but the ETF itself doesn’t have a maturity date. They are a good choice if you are looking for regular income.

    Stock ETFs

    These invest in a specific sector or industry and intend to give investors a way to diversify within an industry. They don’t provide market-wide diversification. A stock ETF could hold high-performing stocks and emerging companies with high growth potential in the same basket.

    Physical Commodity ETFs

    These funds track investments in physical commodities such as gold, wheat, corn, or natural resources such as oil or natural gas. They can also hold shares in related companies such as mining companies or agricultural suppliers. They allow an investor to diversify into commodities without the costs and difficulties of holding physical commodities such as gold or precious metals.

    Currency Exchange Traded Funds

    Investors who want exposure to foreign exchange markets without trading directly on the exchanges can use ETFs instead. Currency ETFs can track a basket of the main international currencies, reducing risk.

    Bitcoin ETFs track Bitcoin futures contracts so an investor can gain exposure to crypto without trading directly in the market. They are technically a currency ETF.

    Style ETFs

    A style exchange-traded fund tracks a specific investment approach, such as large-cap values or small-cap growth stocks. Different funds can combine different market capitalization focuses.

    Inverse Exchange Traded Funds

    These funds are designed for market declines and use short selling to gain profits. 

    Non-US ETFs

    These foreign market funds track market indexes outside the US, such as the Nikkei Index in Japan or the Hang Seng index in HK.

    Actively Managed Funds

    A professional manager takes care of these funds by actively changing the allocation of the index. Because of this active management, they usually outperform an index rather than track it.

    Exchange-Traded Notes

    These are debt securities created to give investors access to specific unique markets. These notes are like a bond but trade like a stock.

    Alternative Investment ETFs

    The structure of these ETFs varies and includes strategies that give investors ways to trade volatility. They may provide access to covered calls or currency carry.

    Build Your Wealth With ETFs Today

    We provide customized investment management, support with an ETF definition and explanation, and retirement planning services. You can trust that your portfolio will be risk-managed with the goal of top performance.

    Contact Bogart Wealth today to discuss your wealth management needs in the McLean, VA, and Houston & The Woodlands, TX.

    Work with a financial advisor who puts your needs first.

    Want to talk first? Call us at
    (866) 237-0121

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