What is an Exchange Traded Fund (ETF)?
An Exchange Traded Fund (ETF) tracks multiple stocks or other securities to conveniently let you invest in a sector, industry, or even region, so you don’t have to pick individual stocks.
Some people want stock in exactly one company. Others want stock in one type of company. ETFs are for the latter — each ETF is made up of several investments in different underlying stocks or other securities. There are different flavors of ETF depending on their investment focus, which can be a certain industry (automotive or tech), a certain region (European or emerging market stocks), or other certain categories of securities, for instance. ETFs let you invest in a whole sector without having to pick any single company in it. And you can buy or sell ETFs just like you would a stock.
If you believe cybersecurity is a smart investment, but don’t know which single cybersecurity company to invest in, you may not have to pick one. Instead, a cybersecurity ETF includes shares of a variety of cybersecurity companies, giving you a more diversified investment in the cybersecurity industry.
An ETF is like an investment smoothie…
Similar to a smoothie, it’s one thing you can invest in that’s made up of a mix of ingredients, available in different asset flavors (i.e., industries, sectors, etc.).
Smoothies come in a variety of flavors, sizes, and tastes — similar to your ETFs. Sometimes they track stock indexes, such as the S&P 500. But they can also provide access to other types of securities. There are a variety of different types of stock ETFs. You can also find ETFs that track an underlying mix of currencies (foreign money), bonds (corporate debt), or even commodities (such as undifferentiated products, like oil or orange juice).
Some common ETFs frequently traded that you might find on the shelf are:
Both contain the word “fund,” but they’re not exactly the same. Mutual funds and ETFs similarly can provide access or exposure to a wider range of investments in one, bundled, fund. Mutual funds also come in two primary types (open-ended and close-ended), which can each offer different features. But while ETFs and mutual funds both provide investment diversification, they differ in their structure, their benefits, and their risks (mutual funds are not offered by Robinhood Financial LLC). Here are a couple differences: 1. An ETF can be traded throughout the day on exchanges at different prices, like a stock. But many mutual funds (like open-ended mutual funds) are only priced once daily, at the end of a trading day, and can only be redeemed after that price is determined daily once trading ends. 2. ETFs typically aren’t actively managed. They’re usually designed to passively track a particular industry, index, or bundle of securities, so management fees can be lower. Mutual funds tend to be actively managed by a fund manager.
ETFs provide a variety of benefits relative to other types of funds, such as mutual funds. Keep in mind that despite these advantages, all ETFs carry risk based on the underlying investments they hold (and which you, as the investor, would gain exposure to as a holder of an ETF, for instance):
Investing is serious, no matter the type of investment — stocks, commodities, mutual funds, or ETFs. In addition to an ETF’s benefits, there are also important disadvantages to keep in mind. And just like any investment, ETFs carry risk, whether that’s the risk of the general market or the specific risk of the companies in which it’s invested. Here are some key disadvantages to keep in mind: