What is an ETF? Exchange Traded Funds are organizations that collect shares from various large companies and sell them in bulk. Investing in an ETF is a good option for those interested in long-term profitability, but too busy (or lazy!) to buy and sell shares 24/7.
Buying a share of an ETF means that you also own a piece of the fund’s assets in exactly the same proportion as the fund itself. ETFs charge a small commission for their work — usually, slightly less than 1% of the fund’s annual assets.
In order to make money on ETF shares, you need to follow the market trends. An easy way to do that is to keep an eye on so-called “indexes”. Indexes are cumulative share portfolios that can be seen as benchmarks for the share prices of specific companies.
For example, there is an index called FXIT, which is based on the stock prices of American IT companies. There is a corresponding FXIT ETF, whose share prices rise and fall depending on the state of the American IT market. Another well-known example of an index-related ETF traded on the LSE is the SPDR S&P 500 ETF (SPY). This one tracks the prices of America’s 500 largest businesses by their stock prices.
It is important to remember that ETF share prices may fluctuate throughout the trading day as they are bought and sold. ETFs can contain different types of investments — including derivatives, commodities, bonds, or stocks — and can be both country-based or international.
Why is an ETF a good investment?
- Normally, a fund’s assets are well diversified. This means that the investment risks are reduced: your money is not dependent on only one company.
- While a share in a fund may cost less than a share in a company. However, you may also earn less than if you sell a share of a company when its market price rises.
- You only need to make one transaction to buy or sell an ETF portfolio share, which means less commission and less time and effort spent on investment. And yes, there are fewer taxes to pay!
- ETFs are the best instruments for a long-term investor because ETF prices tend to rise in the long run.
What is the difference between ETF investment options?
- Commodity ETFs (ex. XGLS) allow you invest in gold or crude oil;
- Bond ETFs (ex. GOVT) might include corporate and/or government bonds. These ETFs are the most secure, since national or local governments are responsible for repaying you;
- Industry ETFs (ex. IITU) include shares from companies of a particular industry and/or country; these might be companies working in the IT field, in banking, or in the oil sector. However, you’d be well advised to diversify your investment assets, since economic crises will likely hit most of the companies in an industry;
- Currency ETFs are related to investment in foreign currency assets.
How do I invest in an ETF?
The answer is easy — with the Orca App after the launch. You’ll be able to get personalised recommendations on which ETF to choose. As for now, participate in our Giveaway and get a chance to win 2,750 GBP in shares. Just go ahead and download our app in the AppStore or on Google Play.