How To Invest and Save Money
Why ETFs Can be an Appealing Way of Accessing Stocks
By Britt Erica Tunick
Investing in stocks can be an attractive prospect, especially during periods where equities seem to be on a seemingly endless upward trend. Unless you are an expert in any one particular industry, investing in stocks is often little more than a guessing game for the average investor and putting together your own portfolio of stocks can be a timely and expensive proposition and, of course, risky.
One way of investing in a diversified portfolio of stocks, without the need to pick and invest in multiple individual stocks on your own, is through exchange traded funds (ETFs). ETFs are baskets of stocks, bonds or other assets that track a specific stock index or sector, but which actively trade on exchanges in the same way that equities do. Like stocks, individuals purchase shares of a specific ETF, with the price of those shares varying throughout the day based on both the value of the underlying stocks within the fund, as well as how actively a particular ETF is bought and sold at any particular point in time.
Since ETFs are open ended funds, communal investments in which shares can be issued or redeemed at any point in time, they are able to benefit from the shared buying power of multiple investors in much the same way that mutual funds do. Unlike mutual funds, however, which are only valued at the end of each trading day and typically involve hefty management fees, ETFs are continuously valued throughout each trading day and the fees associated with investing in them tend to be significantly lower.
First introduced in 1993, ETFs were not immediately popular. In the 25 years since, they have grown to become one of the most actively traded investment vehicles in existence now boasting more than $1 trillion in assets under management in roughly 1,400 different ETFs. Investors can choose from ETFs that mirror the stocks of a particular index, such as the S&P 500 Index; those that provide access to a large range of stocks within a particular sector such as technology; or those that pursue a specific investment strategy, among others.
If your goal is access to a diversified portfolio of stocks, ETFs can be a good way to achieve this. Just keep in mind that, as with any investment, there is a great deal of variance in the ways that ETFs are managed and how they perform.
Britt Erica Tunick is an award winning financial journalist who has spent the past 17 years writing about virtually every aspect of finance. She has mastered the art of boiling down complicated financial topics for readers to understand.
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