Welcome to our ETF educational page. Here we will try to answer some of your questions regarding ETFs and hopefully identify some good approaches to investing in the ETF space.
We are often asked the following questions:
"ETF vs index fund" - what's the difference?
Not much! ETFs are generally based on an index that has been developed, often by a third party, and the ETF's managers work to make the ETF a good representation of the index by buying all the same stocks listed in the index. Following an index rather than actively picking stocks is known as passive investing.
"ETF vs mutual fund" - how are they different?
- ETFs can be traded throughout the day but mutual funds trade only at the end of the day.
- Many mutual funds have active management, whereas most ETFs are based on an index as described above. In the case of active management, invest managers follow their own investment processes rather than simply following an index. Note, however, the mutual fund world is quite complicated and some mutual funds do follow indexes (just like ETFs) and others don't.
- Fees is another area where there can be differences. In general, ETF fees are lower than mutual fund fees because the ETF passive investing style is cheaper to implement and the savings are passed on to investors. It must be said that investors must beware of fees in both ETFs and mutual funds. The more complicated the investment process, the higher the fees. For example, some ETFs write covered calls and some implement a fund-of-funds approach. These kinds if ETFs can have much higher fees that a plain vanilla ETF or mutual fund.
"What are Benefits and Drawbacks of ETFs?"
Exchange-traded funds (ETFs) offer a number of benefits compared to other investment vehicles. Some of the advantages of ETFs include:
- ETFs are a low-cost way to invest in a diversified portfolio of securities.
- Because they are passively managed, ETFs typically have lower fees than actively managed mutual funds.
- ETFs provide investors with instant access to a wide range of assets, including stocks, bonds, commodities, and currencies. This makes it easy for investors to quickly build a well-balanced portfolio.
- ETFs are highly liquid, which means they can be bought and sold easily on the stock market. This makes them a convenient option for investors who need to quickly access their money.
However, there are also some drawbacks to investing in ETFs, including:
- Some ETFs are designed to track a particular index, which means they may not perform as well as actively managed funds in certain market conditions.
- Because ETFs are traded on the stock market, their prices can fluctuate rapidly, which can lead to short-term losses for investors.
- ETFs may not be suitable for all investors, especially those with a limited understanding of the financial markets. It's important for investors to carefully research and understand the risks and potential rewards of any investment before committing their money.
"What kinds of ETFs are out there?"
These days there are ETFS targeting almost every imaginable investment need.
- Need an ETF for a bear market? - Inverse ETFS like those from ProShares or Direxion are available in a number of different styles. They go up when the underlying index goes down. They also come in 2X and 3X leveraged varieties.
- Want an ETF for Vietnam or Brazil? - there are dozens of country specific ETFs as well as ETFs that bundle stocks from multiple countries into ETFs that focus on emerging markets, for example, or the whole European market
- How about an ETF for income? - there are many ETFs to choose from. Some focus simply on companies with strong dividends, some focus strictly on bonds. Some ETFs contain preferred shares. Some use leverage. You can choose between funds that invest in junk bonds or corporate investment grade bonds or U.S. government bonds or foreign government bonds.
- Want to trade commodities? - There are ETFs for gold, oil, agricultural products, even water.
- What about hot sectors? - lately, the hottest sector has been technology. The good news is that there are ETFs that correspond to all sectors: financial, technology, health care, energy, industrial, consumer discretionary, etc., etc.
- I don't want to be so specific. Are there more general ETFs? - There are many general ETFs. Some invest in the all the stocks in the Russell 3000, for example, which would give you exposure to essentially most of the U.S. stock market. Another popular choice are the ETFs that invest only in the S&P 500 index. There are what is known as "style" ETFs that invest in Growth stocks or Value stocks or Low Volatility stocks regardless of industry sector or market cap.
"What are the best ETFs?"
It's difficult to say which ETFs are the "best" since the best option for one investor may not be the best for another. The best ETF for you will depend on your investment goals, risk tolerance, and other factors. Here are some things to consider:
- One way to evaluate ETFs is to look at their performance. You can compare the returns of different ETFs to see which ones have performed well in the past. However, past performance is not necessarily indicative of future returns, so it's important to consider other factors as well.
- Another way to evaluate ETFs is to look at their fees. ETFs are known for being low-cost investment options, but some ETFs have higher fees than others. In general, it's best to choose an ETF with low fees, as these can eat into your returns over time.
- It's also a good idea to research the holdings of the ETF you're considering. This will give you an idea of the types of assets the ETF invests in, and whether they align with your investment goals.
Finally, it's important to remember that no investment is risk-free. Even the "best" ETFs can lose money, so it's important to carefully evaluate the risks and potential rewards before investing your money.
"How to pick ETFs?"
There are a few key steps you can follow to help you pick the right ETFs for your investment portfolio. Here are some tips:
- Identify your investment goals and risk tolerance. Before you start looking at ETFs, it's important to have a clear idea of what you want to achieve with your investments, and how much risk you're comfortable taking on. This will help you narrow down your options and focus on ETFs that align with your goals.
- Research different ETFs. Once you know what you're looking for, you can start researching different ETFs to see which ones might be a good fit. You can look at factors like performance, fees, holdings, and other information to help you compare different ETFs.
- Consider your overall investment portfolio. It's important to remember that ETFs are only one piece of your overall investment strategy. Make sure to consider how the ETFs you're considering will fit in with your other investments, and whether they will help you achieve a well-balanced portfolio.
- Diversify your investments. One of the key benefits of ETFs is that they allow you to invest in a wide range of assets, which can help you diversify your portfolio and reduce your overall risk. Consider investing in a variety of ETFs to help you spread out your risk.
- Monitor your investments and adjust your portfolio as needed. Once you've picked your ETFs, it's important to regularly monitor your investments and make adjustments as needed. This could involve rebalancing your portfolio to ensure you're still on track to meet your investment goals, or selling and buying new ETFs as market conditions change.
Overall, picking the right ETFs involves doing your research, understanding your investment goals, and regularly monitoring your investments. By following these steps, you can help ensure that your ETF investments are well-suited to your needs and help you achieve your financial goals.
Ready to buy? Use our tools and analysis to guide your ETF trading
ETF Insights covers over 2600 index funds. Our comprehensive technical analysis provides a set of special stock screens that focus on:
Top ETF picks based on daily data and developing trends
ETF screener allows you to craft your own custom screens to discover the best ETFs in our database
|Sector and Style Scorecards|
|Trend Performance Scorecard
Over 2600 ETFs are rated according to the change in the strength of their trends since the prior week.
|Price Performance Scorecard
Over 2600 ETFs are rated according to the change in price since the prior week,
Here are some great ways to use our tools and ETF rankings:
- Find top ETFs
- Find ETFs you may never have heard of
- See which ETFs are showing the strongest trends and ride their momentum
- See which ETFs are showing the weakest trends and avoid them!
- Identify the top performing best ETFs in the strongest sectors
- Look for bargains in the weakest sectors
- Identify buy list candidates by finding ETFs that are moving up in the rankings