An ETF stands for Exchange-Traded Fund and they are not complicated at all. Is exactly the opposite. ETFs can be one of the simplest ways to invest in the Stock Market.
An ETF is a basket of underlying securities that allow an investor to be exposed to different areas or assets available in the market.
An ETF can be an incredible tool to add diversification into a portfolio.
So let’s start with a practical example…
The S&P 500 index or S&P tracks the stock performance of the 500 largest companies listed in the American stock exchanges as the NYSE or NASDAQ. The S&P is quite famous in the investing world as an indicator of the health of the Stock Market in general.
Next time you tune to Bloomberg or CNBC, just notice how may times in a hour they mention it.
Therefore, we have ETFs that track the S&P 500 and allow investors to have an immediate exposure to 500 companies just by buying a single ETF.
Isn’t that great?
There are tons of other ETFs available in the market and all of them can be bought in a second through the majority of the stock brokers or even through your bank.
Some of them focus on specific sectors such as Technology or Healthcare, and some others focus on specific countries equities.
There is an ETF out there for each type of investor.
Key Points of Exchange Traded Funds
There are several key aspects of an ETF and the first of them is stated on the name itself. Exchanged-Traded means it is available to be traded during market hours and is likely to available in several exchanges. So, in essence, it behaves just like an individual stock would.
As an European, my stock broker might only allow me to trade ETFs listed in European Stock Exchanges and not American listed ETFs. This will vary from region to region.
Are you considering investing in ETFs? Consider using DEGIRO. They offer more than 200 commission-free ETFs (conditions here), and are regulated in The Netherlands by the AFM and placed under the prudential supervision of the DNB.
Also as with an individual stock, when we buy or sell ETF’s we have a spread and a transaction commission.
The spread is the difference between the Bid and the Ask prices. The commission is the price we pay to execute our order. The latter is dependent on the stock broker of choice.
ETFs Maintenance Fees
Most ETFs charge an ongoing charge from investors which can go up to 1%. In the ETF world, a 1% fee on the invested amount is rather expensive. For reference, ETF investors look for maintenance fees which are lower than 0.5%.
It is also possible that the fund would charge an entry and exit fee, as is the case with mutual funds.
How can I know the costs of an ETF or Exchange Traded Fund?
Usually the fund manager makes important information available in the Key Investor Information document. Before investing in an ETF, we should read carefully this information.
I personally invest in VUSA, which is an ETF that tracks the S&P 500 provided by Vanguard with a cost of 0,07%. So if we want to look for information on this ETF, we can just google search “VUSA KIID”. One of the top results should direct you to here.
You might be interested in other Exchanged Traded Funds. Then just replace VUSA by the ticker symbol of the desired fund.
As mentioned above each ETF is different and so is its underlying assets. Before investing always read the factsheet. This document usually contains some important information such as:
- Investment Approach
- Performance History
- Ticker Symbols
- Top 10 Holdings
As an investor, we should always do our research and make sure we agree with the strategy and be aware of the risks.
If you are interested in knowing more about how I am invested, check the Rocket Portfolio.