Getting into the stock market can be intimidating, especially if you’re a self-directed investor. Having to pick all your investments could keep you from being able to fully participate in the market. However, if you’re planning on investing in exchange-traded funds, then this type of investment can help.
An exchange-traded fund is a great addition to any investor’s portfolio. It can be a versatile and cost-effective way to diversify your investments.
What are ETFs?
According to the experts at SoFi, “An ETF is an investment fund that you can buy and sell like a stock. Instead of a single company, ETFs mix different assets, such as stocks, bonds, commodities, or currencies, and divide its ownership up into shares.”
Unlike traditional stock mutual funds, an exchange-traded fund is typically not managed by a portfolio manager. Instead, it uses a strategy known as passive management, which means it doesn’t rely on a single person to make decisions regarding the selection of securities.
One of the most important things to know about exchange-traded funds is that they are essentially stocks on the New York Stock Exchange. This means that they can be bought and sold throughout the day, and the price of their shares can vary depending on the demand and supply of the market.
Why ETFs are Perfect for Beginner Investors
Unlike other types of investments, exchange-traded funds are ideal for people who are new to the market. They have low expense ratios, are diversified, and have various investment options.
Types of ETFs for Beginners to Invest In
There are many ETF investing opportunities for beginners to try. These types of funds are great for people who are looking to gain exposure to new markets.
1. Stock ETF
Unlike traditional stock mutual funds, exchange-traded funds are designed to track a specific set of stocks. They can provide long-term investors with a more stable and predictable return. Since stocks are prone to market volatility, these types of funds can be a good alternative for people who are planning on investing for a long time.
2. Bond ETF
One of the most popular types of bond ETFs is an exchange-traded fund that focuses on government and corporate bonds. These types of bonds are typically less risky than other fixed-income investments.
3. Commodity ETF
These ETFs are for investing in commodities such as agricultural goods, precious metals, and natural resources.
4. Industry or Sector ETF
These investments track certain industries such as health care, biotech, and energy.
5. Inverse ETF
An example of an inverse ETF is known as a bear or short exchange-traded fund. It seeks to deliver a return on the decline of the index it tracks. Similar to leveraged exchange-traded funds, these types of funds are typically short-term investments that can suffer significant losses if the market goes up or down.
6. Currency ETF
These ETFs work with trading foreign currency and allows investors to gain exposure to the foreign exchange markets.
7. Leveraged ETF
Unlike regular stock funds, leveraged exchange-traded funds are designed to deliver a higher return than the index it tracks. They’re typically used as a short-term strategy. However, losses can also make these types of investments riskier.
Although an ETF may contain various securities, it’s still not a guarantee that your portfolio will be completely diversified. As a beginner, don’t get carried away by the notion that these types of funds can guarantee a balanced and diversified portfolio.