ETFs stand for Exchange Traded Funds, also known as trackers. Same as stocks, they are traded in the investment markets. However, the objective of an ETF is to perform as close as possible to the value of the underlying products of a market meaning that for example, it tries to follow the AEX. The biggest advantage of ETFs is that you can easily diversify your investment portfolio at an affordable price.
Tracking ETFs for the long-term
An ETF can be seen as a product that tracks indexes, bonds, commodities, or a combination of products. Therefore the value of the ETF is dependent on which sector, selection of obligations, or even the value of the commodities are chosen. This is also the reason why ETFs are very different in terms of diversifying. When investing in ETFs, it is recommended to invest in them for the long term and leverage an investment tracker to keep track of the progress you are making. These products are typically used to invest for the long-term, with a horizon of at least ten years.
Benefits of ETFs
ETFs are known to be beneficial for many investors, because of the flexibility in trading, coverage of a broader market, and the relatively low costs associated with it. We are going to dive a little bit deeper to see why this is the case.
- Flexibility: ETFs can be traded just like stocks, making them more flexible than traditional investment funds. Therefore, they can be traded at any moment of a trading day, and you can place various orders based on market, limit, stop limit and stop loss. You can also buy ETFs on a margin or sell them short.
- Market coverage: ETFs consist of a collection of products, which enable you to cover a broader market. Here diversification helps you with reducing the risks of your investments.
- Low costs: ETFs are known to be managed passively. This should result in lower costs compared to actively managing your funds.
Drawbacks of ETFs
Just like other financial products, also ETFs have some drawbacks to consider. We focus on two topics: liquidity conditions and the expense ratio.
- Liquidity conditions: The liquidity between the ETFs can vary, same as stocks. It might be that you are interested in an ETF that is not very liquid, then it will be more difficult to trade the ETF at the desired time and for the desired price. That is why the deviation between the bid and ask price is often used as an indication of liquidity.
- Expense ratio: The annual operating expenses can differ based on the fees charged by a trading broker. Note that the higher the expense ratio, the lower the return of your investment.
Leveraging a tracker for a holistic view
To be able to invest in ETFs, a broker is needed to place your order. There are many online brokers. In case you are starting with your investment portfolio, we recommend you use an investment tracker to create an overarching overview of your portfolio. The advantage of a tracker is the ability to consolidate all your investments. If you are using multiple brokers, you are still able to have a holistic view of your investments. Here you can track your ETFs and notify yourself of the latest market changes.
Extendable with other investments
This also holds for stocks and cryptocurrencies. For these, you can also use a stock tracker or cryptocurrency tracker. Several trackers on the market combine both crypto and stocks into a single overview. Note that investing in ETFs and other financial products can be profitable, but not without risks.