What Are Exchange-Traded Funds (ETFs)?
Exchange-traded funds (ETFs) are investment securities that track various assets, including stocks, commodities, indices, cryptocurrencies, or bonds. They work like mutual funds, whereby you get to invest in single or multiple securities at once. The only difference is that ETFs are bought and sold on stock exchanges like regular stocks. Also, mutual funds are traded once a day after the market closes, while ETFs can be bought and sold multiple times during the day as their share prices fluctuate, preferably using ETFs brokers in the UK.
How ETFs Work
Every ETF has its own provider who owns the underlying assets and is responsible for designing the fund to easily track the performance of the assets attached to it. The ETF provider will then sell their ETF shares to investors, who are free to purchase any amount they can afford without taking ownership of the underlying assets. If you invest in an ETF that tracks a stock index, you are entitled to dividend payments, if any.
Note that the price of an ETF is linked to the net asset value of the underlying asset it represents. For instance, if you are considering investing in a Bitcoin ETF, the underlying asset of the ETF will be Bitcoin. This means that Bitcoin’s current market value will influence the value of the Bitcoin ETF. If Bitcoin’s market value increases, so do the ETF tracking it and vice versa. Overall, ETFs have ticker symbols just like regular stocks, so you can easily locate them to invest.
Types of ETFs
Although ETFs trade like regular stocks, they work like mutual funds and index funds. ETFs are custom collections of securities, meaning they vary when it comes to their investment goals and underlying assets. As an investor, understanding the type of ETF you want to invest in is crucial. This is so that you can fully prepare and strategise for maximum experience and potential. Remember, you can trade an ETF for profit or hedge against an existing investment, thus offsetting risks in your investment portfolio.
That being said, here is an overview of some of the top ETFs in the market today.
1. Stock ETFs
This ETF tracks the performance of various stocks in a specific industry or sector. They are suitable for long-term investments since they carry fewer risks than individual stocks or other ETFs.
2. Sector/Industry ETFs
A sector/industry ETF allows you to invest in various companies within a specific sector. For instance, a health industry ETF tracks companies in that sector. You can invest in the industry sector to short an existing investment or take advantage of economic changes.
3. Commodity ETFs
These are funds consisting of derivatives contracts like futures for various commodities, whether gold, silver, crude oil, etc. Trading this ETF allows you to gain exposure to multiple commodities without taking full ownership.
Besides the above three types of ETFs, you can also invest in Bond ETFs, currency ETFs, Leveraged ETFs, and inverse ETFs. Keep in mind that ETFs can either be passive or actively managed. Therefore, ensure you fully understand the type of ETF you want to invest in before taking the plunge.
How to Buy ETFs
ETF investments give you an opportunity to get exposure to short-term price movements of assets in various sectors. To do so, you need a reliable and secure broker with access to the exchanges that list the ETFs. You can also invest in ETFs by taking CFD positions, whereby you only speculate on an ETFs rising or falling price and make a profit or loss from the price difference. However, CFD trading comes with a risk of losing a lot of money. Therefore, ensure you are familiar with this ETF trading method before putting your money in it.
Keep in mind that there are numerous ETF brokers in the UK, and it is crucial to find the one that is FCA-regulated and has features meeting your trading needs. It should also be affordable to avoid spending more than you had budgeted for.
Final Thoughts
Trading or investing in ETFs is an excellent and cost-effective way to gain exposure to various securities. For instance, instead of purchasing single company stock, you can invest in an ETF that tracks the performance of an index. By getting exposed to diversified assets, you limit the risk of losing a lot of money in a single investment. Remember, ETFs are versatile, liquid, and low-cost assets, making them popular and worth trying in 2023.
