Let us start with the fundamentals before we move on to exchange traded funds (ETFs). What is a fund? A fund is a product [like a savings account] that allows you to put your money in a pool with other people’s money. This pooled money is given to a professional money manager who invests it in a collection of assets and charges you a management fee. The investment can be anything from a collection of shares, property, bonds, or commodities.
“A low-cost index fund is the most sensible equity investment for the great majority of investors.” Warren Buffett
So, what are exchange traded funds (ETFs) again?
An Exchange-Traded Fund (ETF) is also a type of fund. The difference is that they are exchange-traded, meaning they can be bought or sold on a stock exchange at any time during the trading day. Put another way, they are traded like any other shares on a stock exchange.
What makes up an ETF? Much like the traditional funds described above, they comprise a collection of assets. These assets include shares, bonds, property, or commodities.
The two key differences between an ETF and a traditional fund are that the ETF imitates an index, commodity, or particular stock in a sector, industry, or even a world region. Secondly, ETFs have lower management fees than traditional funds.
For example, if you decided to buy a FTSE 100 ETF today, you would effectively be invested in an ETF fund that holds the 100 most capitalized stocks trading on the London Stock Exchange. The performance of your FTSE 100 ETF should closely match the performance of the FTSE 100 index, i.e., the 100 most capitalized stocks on the London Stock Exchange. The risk you are taking would be specific to this index.
There are lots of good reasons to find out more about ETFs. The two most important ones are:
1/ They are an excellent way to diversify your portfolio of assets. It removes the need to decide on buying an individual stock as a beginner. There is an extensive selection of ETFs out there. In “The Little Book of Common Sense Investing,” by John Bogle, Warren Buffett, arguably the greatest investor of all time, said, “A low-cost index fund is the most sensible equity investment for the great majority of investors.” Sage advice from a renowned investor!
2/ / ETFs are low-cost, so you keep more of your earnings than if you were investing in an actively managed traditional fund. The deal will be sweeter if you can find a trading platform that offers you free trading in ETFs.
An excellent platform to start your research is Vanguard, a leading source of ETFs. Alternatively, here are some book ideas to help you read up on the topic.
This article is not financial or personal advice. We are not financial advisers. The information contained in this article is designed for educational and informational purposes only. It is provided solely to enable you to make your own choices. Always remember that if you choose to invest, the value of your investments can fall or rise, so you could get back less than you invested. So, it is essential to seek advice from a qualified, authorised and registered professional. Note also that past performance is not a reliable indicator of the future performance of any investment.
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