- Tracks an index
- Lower costs than traditional mutual funds
- Powerful diversification tool
So you think you have a good grasp of the stock market. You know what a stock is, how a trade is made, and even what IPO stands for… Let’s increase your financial swagger and explore ETFs.
ETF is short for an exchange-traded fund and is a collection of stocks or other assets. When you buy one, you’re buying all of the shares that are in the ETF without having to buy each one separately. Just like stocks, ETFs are traded on an exchange, and because of that they can be bought and sold throughout the day. They usually track an index like the S&P 500 or the Dow Jones Industrial Average (DIA and SPY are two of the most popular).
Others can track things like how gold is doing (like GLD & SGOL) or even the global demand for water (like SGW). When these indexes go up or down, so does that the price of an ETF and the value of your investment.
ETFs are a vital diversification tool that has recently gained popularity because of their costs, which are lower than traditional mutual funds. That means you don’t have to pay as high of fees to own one (score)! It also gives investors the opportunity to grab a piece of things that are typically very expensive and complicated. Instead of buying a bunch of gold bars and burying them in your backyard, you can buy a gold ETF and still enjoy the perks.