An Exchange-Traded fund or ETF is a common financial product consisting of multiple assets. They’re popular among investors as they provide a way to combat volatility and gain broad exposure without much effort. But what do you need to know about ETFs before investing? We answer below.
Basics of ETF Trading
Before you start investing in ETFs, it’s important to understand them. An ETF is a collection of assets bundled into one investment product. By putting money into an ETF, the investor gains exposure to all the companies it contains. As such, ETFs are a strong way to diversify a portfolio.
Most exchange-traded funds are passively managed, meaning they’re based on a specific market index like the S&P 500 or FTSE 100. Passive ETFs aim to produce consistent results over the long term. Actively managed ETFs have a professional manage the fund, aiming to beat the market.
Types of ETFs
As we’ve touched on, ETFs are a fairly broad product that encompasses many objectives. As such, there are lots of different types of ETFs, each designed for a particular purpose. To unlock the power of ETFs, it’s important to familiarise yourself with some popular options:
- Sector ETFs: Provide investors with a way to get exposure to specific market sectors like software or entertainment.
- Commodity ETFs: Offer exposure to a specific raw material like oil or wheat and companies involved in its extraction/cultivation and processing.
- Dividend ETFs: Focus on stocks known for paying consistent dividends, generating regular income for investors.
- ESG ETFs: Environmental, Social, and Governance (ESG) ETFs consist of companies that prioritise sustainability.
- Growth ETFs: Consists mostly of stocks that could grow quickly or have consistently outpaced the market's average rate.
So, there are many types of ETFs, each suited to different purposes. This expansive categorisation ensures they’re useful regardless of your goal and makes them particularly valuable for augmenting a portfolio or getting exposure to a certain sector in a way that makes sense with your broader objectives.
Exchange Traded Funds (ETF) FAQs
Now that we have a basic understanding of trading ETFs and the forms they can take, it's time to delve into some of the most crucial questions commonly asked by investing beginners.
How Do Exchange-Traded Funds Work?
It can be challenging to learn how ETFs work, but they are fairly simple products. ETFs are a basket of assets that can (but don't have to be) be linked to a certain sector. They are traded on stock exchanges throughout the day and investors often utilise them for diversification purposes.
Are Exchange Traded Funds Mutual Funds?
Common questions asked by new investors include, "Are ETFs index funds?" and "Are ETFs mutual funds?" As all three products are similar, the answer can be confusing.
Index funds track a certain market index like the S&P 500 and can include ETFs or mutual funds. The key differences between an ETF and a mutual fund are transparency and the ability to trade throughout the day.
What Are Gold Exchange Traded Funds
As the name implies, a gold ETF is a financial instrument that tracks the price of physical domestic gold. Some gold ETFs are backed by physical gold ownership, but all of them are highly liquid and can be traded with ease on a broker. Examples include SPDR Gold Shares (GLD) and iShares Gold Trust (IAU).
How Does Investing in ETFs Work For Beginners?
Anyone can get started with ETF investing in a few straightforward steps. Register with a trusted broker, verify your account, deposit funds, browse ETFs, find a potential opportunity, and invest. People must also manage their position, deciding when to add to or close it.
However, there are a few other important things to keep in mind during the investing process. Consider expense ratios (annual fees taken from your investment) and aim to keep them below 0.5%, whether an ETF is actively or passively managed, and if it distributes dividends.
ETFs beginners commonly invest in are simple and easy to understand, like the iShares Core FTSE 100 UCITS ETF, which tracks the 100 largest companies listed on the UK's London Stock Exchange (LSE). While you can invest in complex ETFs, it's advisable to build a solid foundation of knowledge first.
Are Exchange Traded Funds Safe?
One of the most commonly discussed advantages of exchange-traded funds is their volatility resistance. ETFs are much less susceptible to influence from news or events that would cause a large movement in an individual stock. However, they're often tied to a particular sector, which does present some risk.
But are ETFs safe? As they comprise multiple assets, ETFs are much more resilient against downturns because when one company falters, the others in the fund will lessen the impact. That said, no investment is entirely safe, and traders should always analyse an opportunity before taking it.
Where To Buy Exchange-Traded Funds?
Once you’ve determined that an ETF is the right financial product for you, the next step is finding a platform where ETFs are traded so you can invest in one and store it. For this, you’ll need to register with a trustworthy broker that supports ETF trading, like ActivTrades.
So, you need a broker to invest, but how can you tell the good from the bad? There are a few important things to consider: ensure you use a regulated broker as they’re safer, look for a platform boasting low/transparent fees, and prioritise those with fast order execution, as it’ll help you get the best prices.
Are Exchange Traded Funds a Good Investment?
When deciding if ETFs are a good investment, it's essential to consider your individual objectives and whether ETFs are the best way to meet them or if a different financial product, like a stock or commodity, would better fulfil your needs.
Generally, ETFs are a good choice for people who are seeking a simple way to diversify their portfolio or a lower-risk investment that doesn't require as much active management. They also suit those aiming to speculate on a particular sector in a straightforward way.
Are Exchange Traded Funds High Risk?
Exchange-traded funds are popular among risk-averse traders due to their inherent diversification and resistance against volatility. Are ETFs high-risk? The answer will depend on the specific fund you invest in. However, ETFs are generally considered safer than leveraged products like futures.
Should I Invest in Multiple ETFs?
Once a beginner has decided on an exchange-traded fund, the next question is usually, "How many ETFs should I invest in?" Unfortunately, there is no one-size-fits-all solution. The answer will vary based on your budget and diversification goals. However, one to three ETFs will likely suit most people.
How To Choose ETFs for Beginners?
One of the most essential aspects of the ETF trading process is learning how to choose good or interesting ETFs. Considering your investment goals and preferred ETF type is crucial. Similarly, reviewing key stats like trading volume and expensive ratio is critical to choosing a fund that suits you.
However, there are other important factors to consider, like ETF size, issuer, and performance. We discuss these factors more in part two of our ETF beginners guide.
What Are the Best Exchange Traded Funds?
Deciding what ETFs to invest in is a difficult task. There are thousands of options, each tailored toward various preferences, objectives, or sectors. The reality is that there is no best ETF to buy. Many worthwhile options are available, so it comes down to individual requirements.
That said, to give people a rough idea of what ETFs to buy that are common investments, some of the most popular are the Vanguard S&P 500 ETF (VUSA), Invesco EQQQ NASDAQ-100 ETF (NNDX), and the iShares Core FTSE 100 UCITS ETF (ISF).
How Many Exchange Traded Funds Are There?
There are many categories of exchange-traded funds tied to certain markets, sectors, themes, or characteristics. They can also be created to track an economy or commodity. For example, a zinc ETF might track the price of Zinc and extraction/processing companies.
As a result of their diversity, there are thousands of ETFs globally. According to VettaFi’s ETF directory, there are at least 4,089 exchange-traded funds split across nine separate asset classes.
How To Trade ETFs With ActivTrades
If you plan on trading ETFs for beginners, you’ll need to register with a reputable broker. Selecting the right platform is crucial. You’ll use it to browse assets, find opportunities, perform analysis, and place trades. You also need to trust the broker with your funds.
Ideally, you should select a platform that offers transparent fees, fast order execution, and a solid range of assets. ActivTrades is a great option as we're regulated and connect with leading trading software.
How To Set Up an ActivTrades Account
The process of registering and verifying an ActivTrades account is straightforward and can be completed within a few minutes. Here are the steps:
Step 1) Create an ActivTrades Account
First, head to the ActivTrades website and complete the registration process. You’ll need to enter your country of residence, title, name, email, and password.
Step 2) Enter a Phone Number
Afterwards, you must enter your country code and phone number. Make sure it’s correct, as it'll be used by ActivTrades to contact you if needed.
Step 3) Provide Personal Details
Next, you’ll have to input your nationality. You’ll then be prompted to enter a tax number. Next, enter personal details like your address, employment status, income, initial deposit amount, and source of funds.
Step 4) Verify Identity
After entering your details, you'll have to complete the identity verification process. You’ll need an in-date photo ID (passport, driving licence, national identity card). The verification process can be conducted by uploading a photo or taking one via your mobile device.
Step 5) Choosing Your Platform
At this stage, you’ll need to enter your main trading purpose and select your trading platform (you can change the platform later). Then select your preferred trading currency and accept our agreement. Lastly, confirm your email and wait for the verification process to be completed.
How To Use ActivTrades To Trade ETFs
Now that you’ve got an ActivTrades account, you’re ready to learn about investing in ETFs for beginners.
Step 1) Deposit Funds
After verification, you’ll need to fund your account. Click the green 'Deposit' button, choose a payment method (crypto, bank transfer, credit/debit card), and complete the deposit.
Step 2) Access ActivTrader
For the next step in our ETFs beginner guide, head to the ActivTrader platform by clicking the 'Access Platform’ button under the 'Platforms' tab. This is where you will conduct trades.
Step 3) Find ETF and Perform Analysis
Search for an ETF using the side navigation bar, click it to add it to your watchlist, then drag it onto the chart to view the instrument. There is also an ETF category for investors to browse. ActivTrader integrates TradingView, so people have access to drawing tools and indicators for analysis.
Step 4) Trade ETFs
When you’re ready to trade ETFs, click the 'Buy' or 'Sell' buttons to open the trading interface. Enter your lot size, take profit/stop loss levels, and press 'Place Order' to open a position.
Step 5) Extra Features
ActivTrades offers several other useful features. For example, investors can set up a demo account to practise without risk or connect the broker to the popular MetaTrader software.
Summary
Exchange-traded funds, or ETFs, are popular financial products consisting of a basket of assets, sometimes linked to a particular sector or index. They're similar to mutual funds and great for diversifying a portfolio and reducing risk, so investing in ETFs is beneficial for beginners.
As there are many types of ETF branching into various categories, they're a particularly versatile financial product that can benefit most portfolios. However, investors require a broker to purchase an ETF. ActivTrades is a great option we're regulated, offer many ETFs, and provide a platform that is simple to use.
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