What is an ETF?

The concept of investing can be daunting — you have to find stocks, research them, and find the best time to purchase them. Then, after that’s said and done, you have to constantly monitor your investment to make sure it’s performing well. However, this doesn’t have to be the case. ETFs can eliminate the hassle of traditional investing through their passive management style.

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An ETF (Exchange Traded Fund) trades just like a stock. You can buy and sell them whenever the stock exchanges are open. This a major reason why investors choose to invest in ETFs instead of mutual funds, which trade once per day.

ETFs also allow you to purchase shares in multiple different companies through one investment. Purchasing ETFs allows for easy investment diversification which helps to spread out your risk.

For example, you could purchase a technology focused ETF that gives you exposure to shares of Apple, Amazon, Google, and Facebook, among many other technology companies. At the time of this writing, that ETF (Ticker: XLK) would cost $113 per share. However, purchasing shares of just the four aforementioned companies would cost you more than $4,000 at current share prices.

With ETFs, your risk is spread out among all of the companies included. If one stock in the ETF drops 10%, it would have a minimal impact on the ETF’s price. Conversely, if you owned a single stock that dropped 10%, you would lose that much on your investment.

The S&P 500 is a major stock index that has returned around 8% on average to investors each year. Keep in mind that the 8% return is not guaranteed, and investments always have the potential to lose value. If you want to invest in an ETF that gives you exposure to the 500 largest companies in the world, an S&P 500 ETF could be the best choice. The two most popular S&P 500 ETFs have the ticker symbol VOO or SPY.

Check out this scenario! If you started with $100, invested $100 each month and earned an 8% annual return for ten years, you would have around $17,600 having contributed $12,000. A gain of $5,600!

The biggest benefit of an ETF is the potential for passive returns, meaning less work is involved in making the investment. You simply find an ETF, purchase it, and watch your investment grow. Compare that to traditional investing where you find single companies, research them, purchase them, and constantly monitor them for major price changes.

If you want to get started investing in ETFs, check out the page “Your First Investment” under the Investing tab for more information!