What is an ETF?
ETFs are one of the financial products that seen the most growth during this new millennium. Due to its (relative) novelty and lack of knowledge, I’d like to briefly summarize what this financial product is about.
Key Features of ETFs
An ETF is an investment instrument whose characteristics coincide with both traditional mutual funds and equities. An ETF allows us to replicate the movement of any financial index or product.
An ETF is also considered a stock exchange that trades in a market. The profitability of this ETF would depend on the profitability of each of the assets that make up the ETF. The ETF has a net asset value, which is in line with its market value, although the real value will not be known until the end of the trading day.
The price of the ETF is known at all times. It represents the index, so you always know what values are part of the ETF.
You can buy and sell it as easily and as often as you want or need to throughout the trading day. here is no waiting period.
ETFs are products formed by shares of different sectors, allowing you to diversify through a single investment product.
ETFs allow you to take advantage of the returns offered by all the elements that make up your portfolio, so you can offset bad performers with good results, and generally get better returns than if you were only invested in a single company. Be forewarned, there are big caveats to this, however, depending on the type of ETF.
How do ETFs pay?
The taxation of ETFs is similar to that of equities. They vary depending on your tax bracket, capital gains, and numerous other factors, but for simplification purposes, they are essentially taxed similarly to stocks. Vanguard details their taxation here.
ETFs, unlike traditional funds, have very low management fees. They are a form of passive management to be sure.
In summary, ETFs are very interesting financial products for several reasons:
- They allow more active investment strategies.
- They make it possible to achieve a level of reasonable diversification quickly and easily.
- They involve lower management fees.
So there you have it. Again, our goal is to provide you with a baseline understanding of different types of securities. You should do more homework before investing your hard earned money. However, these are fairly safe products so if you’re ready to try investing in one, you can check out Forbes’ list of 2017 ETFs.