ETFs

Have you ever wondered what an ETF is and how Investing in ETFs works? ??

ETFs let you invest in a host of markets, from European shares to US government bonds and gold, as easily as trading a single stock. In our “ETFs” learning guide, we'll walk through the world of ETFs and discuss how you can use them to build a balanced portfolio. ??

Let's get started!

Chapter 1: What are ETFs?

How ETFs allow you to buy whole markets like a stock.

Exchange-traded funds (ETFs)?track the movements of an index, making it easy to invest in a whole host of markets – from European shares to US government bonds and gold. Like Amazon and Radiohead, ETFs have exploded in popularity since being launched in the 90’s – and there are now about?5,000?globally investing more than?$5 trillion. ??

ETFs have many similarities with traditional tracker or index funds, which also copy the performance of an index such as the S&P 500. But their particular success is largely due to the ways they resemble stocks.

How are they like stocks?

Well, as the name suggests,?ETFs trade on exchanges??? (venues that connect people wanting to buy with those looking to sell). This means they can be bought or sold at any time during the working day – unlike most traditional funds, which can typically only change hands once a day, usually at the end of the day.

And, as with stocks, investors can also sell ETFs short (betting that the price will fall) or purchase options (wagers that the ETF will be trading above or below a certain price on a future date), although these are more complex ???? ♀? instruments not available through Wealthyhood.

They’re also like stocks in that some ETFs are incredibly popular with investors, changing hands thousands of times a second, while some trade much less frequently.

That’s all for our first chapter on ETFs. In the next chapter, we’ll walk you through the different types of ETFs available. ??

Chapter 2: Types of ETFs

As we said last time, there are over 5,000 different exchange-traded funds out there – and growing!

Why have they become so popular?

As well as offering easy access to a diverse bunch of investments, ETFs generally?charge lower fees??? than traditional funds and have no minimum investment amounts. You can usually start investing in an ETF with as little as ￡1. The average ETF charges about 0.4% (so if you invested ￡1,000, you’d have to pay about ￡4 a year), compared with about 0.7% for a traditional index fund. ??

You can buy ETFs to?track almost any financial market?you can think of: from Chinese ???? stocks and the US ???? dollar to platinum futures and German ???? government bonds. You can even get ETFs for specific industry sectors – like biotech ?? stocks or semiconductor providers.

Put it this way: if stocks were pieces of music, then ETFs would be Spotify playlists. Instead of selecting an individual track to listen to,?you just choose a theme?(like tropical house or Mellow Mondays) and get a bunch of music ?? that fits that description.

So ETFs are purely passive?

Most ETFs just aim to track the performance of a market, which allows them to keep fees low. But there are a few funky numbers out there.?Inverse ETFs??? rise in value when the index they follow falls (and vice versa). For example, the ProShares Short S&P 500 ETF would gain 3% if the S&P 500 index of US stocks dropped 3%.

Leveraged ETFs, meanwhile, multiply the moves of their underlying investments – so if the S&P 500 rises 2%, a 3x leveraged ETF would climb 6%. There are also leveraged inverse ETFs – but you can probably figure that one out yourself.

That’s quite enough for one day. ???

Next, we’ll explore even more specialised sorts of ETF – active ones. In the meantime, why not spin some “German government bond” vibes on Apple Music?

Chapter 3: Active ETFs and smart beta

How ETFs can be used to implement active strategies

For most of their history, ETFs were purely passive products – tracking a market such as the S&P 500 or gold as closely as possible for a low fee. But recently, companies have launched?active ETFs?– where?money managers make decisions on what to buy and sell, like a traditional investment fund. ??

Why would anyone do that?

A bit of action gives the ETF the potential to beat the performance of the wider market. However, many academic studies have shown that?passive tracking beats the majority of active managers eventually? While more expensive than their passive cousins, active ETFs also generally offer lower fees than traditional funds.

Are there other ways to beat the market?

Some ETFs sit halfway between passive trackers and active stock-pickers – these are known as “smart beta” ETFs and have grown in popularity since first hitting the market a decade ago. Smart beta ETFs use?computer-defined????rules to pick investments with certain qualities?(known as factors) rather than a human asset manager’s judgment.

Popular factors include:

• value: buying stocks that are cheap;
• momentum: buying winning stocks that have recently outperformed;
• size: buying stocks that are small;
• volatility: buying stocks with lower price swings.

Over the long term, stocks meeting these criteria have historically risen slightly more than the market as a whole (though that’s no guarantee it’ll happen in the future). ??

How does this work?

The theory is that?factors exploit investors’ human failings, which direct more money than is justified to certain stocks – like favouring glamorous companies with fast-growing profits over cheap ones or plumping for the biggest names in a sector over smaller “hidden gems”.

That’s it! Check back next time when we’ll talk about how to construct an ETF portfolio. ????

Chapter 4: Building an ETF portfolio

Can you build a balanced portfolio with just two products?

You can use ETFs as part of a broader investment mix ?? – or you can?construct an entire portfolio from ETFs. The range of different ETFs can make it easy to build a?balanced portfolio???, where any losses in one investment are hopefully mitigated by gains elsewhere.

How do I start?

With more than 5,000 ETFs to choose from, you’re going to have to do some whittling down.

Good news!?????

At Wealthyhood, we’ve done it for you! You only have to select the asset classes, geography, industry and themes you want to invest in, and we’ll handle the rest. We’ve pre-screened the entire ETF universe to?cherry-pick the ETFs that match the criteria you select. ????

How many ETFs will I need?

ETFs’ breadth is many times considered enough to build a pretty diverse portfolio with just two: one tracking global stock markets and one tracking a broad measure of bonds. This setup has the virtue of simplicity – it’s really easy to track performance over time and rebalance between the two if you feel the need.

If you want to go broader, you can try splitting your investment between half a dozen ETFs. Perhaps a general?US stocks?ETF, one for major?global?stock markets, a?gold?or?real estate?ETF, and a few?bond baskets?of varying geographies.

You could even add?ETFs tracking specific themes or industries, like cloud ?? computing, clean energy ??, biotechnology ?? or video gaming. ??

What else do I need to think about?

As we’ve discussed in other learning guides, make sure the holdings of your various ETFs don’t overlap too much – or else you’re reducing your diversification. ETFs are very transparent – revealing every day exactly what they’re invested in – so you can check that out easily enough.

At Wealthyhood, you can always go to each ETF’s page and check out the top-10 holdings to better understand your exposure. ??

How to buy an ETF?

Now, you’ll need to put the theory into practice. There are a few online apps and platforms where you can buy, sell, and monitor your ETFs; just sign up!

But before that and above all: focus on fees. Make sure you know how much the ETF provider is charging per year and how much your broker will charge you to buy and sell. If you’re a?Wealthyhood?user, that’s no problem for you. ????

ETF investing comes with no commissions at all, and we’ve made our homework to pick providers, like?Vanguard,?Blackrock,?Invesco,?WisdomTree?and more, with some of the lowest management fees out there. ??

And that’s that.

You’ve completed our pack on ETFs and smart beta and now that you have the knowledge ?? you need to get involved if you so desire.

Source: Finimize

Always keep in mind that when investing, your capital is at risk. These ideas are food for thought. If you are unsure about what to do you should seek professional advice.

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