Search

TO ETF OR NOT TO ETF

WHAT IS AN ETF?

An exchange traded fund (ETF) is a type of security that involves a collection of securities—such as stocks—that often tracks an underlying index, although they can invest in any number of industry sectors such as IT, Financial, Healthcare, or use various strategies such as income, growth.

  • Availability: ETFs are listed on exchanges and ETF shares trade throughout the day just like ordinary stock. ETFs (EU regulated – see below) are available on all online trading platforms such as Degiro, Saxo, Interactive Brokers, etc..

  • Variety: ETFs can contain many types of investments, including stocks, commodities, bonds, or a mixture of investment types. An exchange traded fund is a marketable security, meaning it has an associated price that allows it to be easily bought and sold.

  • Diversification: As an ETF is a type of fund that holds multiple underlying assets, rather than only one like a stock, they can be a popular choice for diversification.

  • Industry/Sector: An ETF can own hundreds or thousands of stocks across various industries, or it could be isolated to one particular industry or sector. Some funds focus on only U.S. or Euro offerings, while others have a global outlook. For example, banking-focused ETFs would contain stocks of various banks across the industry.

  • Low cost passively managed:: ETFs typically have low expenses compared to investment funds since they track an index. For example, if an ETF tracks the S&P 500 index, it might contain all 500 stocks from the S&P making it a passively-managed fund and less time-intensive. However, not all ETFs track an index in a passive manner.

  • Actively managed: There are also actively-managed ETFs, where portfolio managers are more involved in buying and selling shares of companies and changing the holdings within the fund. Typically, a more actively managed fund will have a higher expense ratio than passively-managed ETFs.

Summary of advantages

  1. Access to many stocks across various industries

  2. Low expense ratios and fewer broker commissions.

  3. Risk management through diversification

  4. ETFs exist that focus on targeted industries



As always, the above is not a recommendation and please seek independent financial advice before making any investments.

Smart Money Series

SMS logo-01.png