INSIGHTS & EDUCATION

ETF Investing basics

Learn why exchange-traded funds (ETFs) can be a smart investment choice.

What is an ETF?

Transcript

ETF is short for exchange traded fund. ETFs track the performance of a particular stock market index like the S&P 500 or NASDAQ-100. ETF fund managers typically seek to mirror the index's holdings and weightings. Giving investors broad exposure to a specific asset class or market sector. Only ETF shares can help provide you with investment diversification. Potentially helping to manage your overall investment risk. And there are many other important benefits that ETFs can offer. Want to learn more? Check out our other videos.

What are the benefits of an ETF?

Transcript

Thinking about investing in an exchange traded fund or ETF? Let's take a closer look at four potential ETF benefits that may help you decide. First, ETFs tend to cost less than other funds. Those savings can really add up over time. ETFs are also easy to buy and sell. Just like stocks, you can trade them on a number of exchanges whenever markets are open and they're transparent. You can see the prices of ETFs in real time and know exactly what securities they're holding on a daily basis. ETFs can give you control over which sectors you invest in, so, your portfolio reflects what's most important to you. Want to learn more? Check out our other videos.

How do ETFs compare to mutual funds?

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How do exchange traded funds or ETFs compare to mutual funds? Much like mutual funds, ETFs can offer you a quick and easy way to help build a diversified, professionally managed portfolio. By pooling your funds with other individuals, you're able to purchase a broad basket of securities through a single investment. Both give you a wide range of investment choices. And because many ETFs passively track a market index, much like the index mutual funds, they're typically able to charge lower fees than other more actively managed investments. But ETFs may also deliver certain advantages that most mutual funds often can't provide. Like simple pricing. You don't have to choose between multiple share classes with different fee structures, investment minimums and redemption rules. There's only one type of ETF shares, no investment minimums, and no restrictions on buying and selling your shares whenever the markets are trading. Want to learn more? Check out our other videos.

What are the differences between stocks, ETFs and mutual funds?

Transcript

Investing is like going on a journey to have a safe and enjoyable trip. You must do your research thoroughly. Just like travel, there are tools to help with investing. Want to have the most fun? Understand them well now.

Stocks are like a self-guided tour where there is no tour guide to lead. Instead, you need to research each stock by each and be mindful of the risks. Invest within reach; however, you are free to choose how to play and which to buy, giving you the freedom to create your own way.

Too busy to plan your travel routes? Just join an organized tour group. A guide will lead the way making your trip fun every day. Same with investors buying mutual funds. Save time and hassle with less research; let the fund manager handle the investment castle. Of course, there are pros and cons. You might not know every detail of the portfolio. It’s like a tour guide leading you to shop; sometimes you may not find what you want on top.

If transparency in travel is what you seek but a ready-made itinerary is what you need, travel package will certainly do. Tailored to your needs without ado, like a "Thailand's Top Three Water Park" package highlighting "Thailand," "Top Three," and "Water Park", easy to check it out if it suits your taste. A hassle-free adventure awaits.

Hooray!

Of course, travel agencies offer many themes to choose, like a 5-Day Hot Spring Tour in Japan, to a Michelin-Starred Gourmet Tour in France, or a Luxury 6-star Hotel package in Dubai. There's something for everyone found.

Some investors go for ETFs, like travel packages. They track indexes with high level of transparency, diversify stock holdings under your specified conditions, with the benefits of a diversified portfolio to go. Stock, ETF, and mutual fund all in tow, choose your investment style with care. Investing is like a journey, so be prepared.

Invesco provides a range of diverse investment solutions. Explore the world of investing at your own pace. Invesco has got you covered, no matter the place.

Key information about ETFs

Exchange traded funds (ETFs) are a type of investment that can provide you with diversified exposure to a certain focused area or sector of the market. Typically, ETFs are designed to closely track a particular market index like the S&P 500 or the Nasdaq-100. ETFs are ‘pooled fund’ investments (meaning the assets of many individual investors are pooled together to purchase the fund’s holdings).

By owning shares in the ETF, you gain exposure to its holdings without owning the underlying assets. ETFs can offer a convenient way to help achieve diversification that can help reduce the overall investment risk of your portfolio.

Certain funds and portfolios in and of themselves do not qualify as diversified investment strategies.

There are ETFs available for a wide range of investment choices — from tracking domestic and international stock indexes, to market sectors and even commodity indexes. ETFs offer a way for you to invest broadly across an area of the market you’re interested in or care about through a single bundled investment. They also tend to be passively managed, rather than active, and generally have low fees.

Unlike other investment vehicles, ETFs do not require a large minimum investment. And because they’re traded on exchanges, like stocks, you can get started by purchasing just a single share if you want.

Low cost: Since ordinary brokerage commissions apply for each ETF buy and sell transaction, frequent trading activity may increase the cost of ETFs.

ETFs combine some of the key benefits of mutual funds (broad diversification and sector-specific strategies) with the flexible trading of stocks. They typically carry lower fees than mutual funds, as well as greater transparency.

ETFs offer greater trading flexibility and control compared to mutual funds (which are priced only once daily at market close). ETFs offer real-time pricing, their holdings are disclosed daily, and they can be traded anytime throughout the day — giving you far more control over buying and selling shares.

And perhaps most importantly, ETFs have simple, transparent pricing and expenses — no multiple share classes or fee structures.

Investors should be aware of the material differences between mutual funds and ETFs. ETFs generally have lower expenses than actively managed mutual funds due to their different management styles. Most ETFs are passively managed and are structured to track an index, whereas many mutual funds are actively managed and thus have higher management fees. Unlike ETFs, actively managed mutual funds have the ability react to market changes and the potential to outperform a stated benchmark. Since ordinary brokerage commissions apply for each ETF buy and sell transaction, frequent trading activity may increase the cost of ETFs. ETFs can be traded throughout the day, whereas, mutual funds are traded only once a day. While extreme market conditions could result in illiquidity for ETFs. Typically they are still more liquid than most traditional mutual funds because they trade on exchanges. Investors should talk with their financial professional regarding their situation before investing.

Transparency: Most ETFs disclose their holdings daily.

When buying or selling ETF shares, there are a few trading tips you may want to consider. If possible, avoid transactions at the open and close of the market — when prices tend to be more volatile. In a similar vein, try to pre-determine the price points at which you want to buy or sell shares, using limit orders rather than market orders. Also, investing in ETFs that have a significant enough daily trading volume may help to minimize the spread between ‘bid’ and ‘ask’ prices.

Frequently asked questions

Some investors use ETFs to gain exposure to broad ranges of companies rather than picking individual stocks, which reduces single-stock risk. 

The decision to include ETFs in your portfolio will vary by your unique goals, time horizon, and risk tolerance. Investors can help diversify their portfolio with a handful of broad-based ETFs for various asset classes.

The market price of an ETF share is determined by the net asset value (NAV) of the underlying portfolio as well as supply and demand in the marketplace. Bid-ask spreads and premiums and discounts to NAV may also impact the price an investor pays for an ETF share.

For more details on how ETFs work, click here.

Bid/ask spread is the amount by which the ask price exceeds the bid price for an asset in the market.

ETFs can be actively or passively managed, and the choice depends on an investor’s financial objectives. Some financial professionals use a mix of active and passive ETFs in diversified client portfolios.

ETFs are different from individual stocks in that an ETF’s liquidity is based on more than trading volume alone. A better predictor of an ETF’s liquidity may be the liquidity of the underlying holdings.

An ETF’s total cost of ownership depends on more than just its expense ratio. Investors also need to consider bid-ask spreads, trading commissions, and premiums and discounts, for example.

ETFs are popular because they typically give investors access to broad market exposure with low fees and transparency. ETFs can be actively or passively managed and can be bought and sold like an individual stock.

 

ETF is short for “exchange-traded fund.” ETFs are baskets of securities that can be bought or sold on exchanges similar to individual stocks. ETFs can provide exposure to broad areas of the market in a single, bundled investment. They are often passively managed and typically seek to track the performance of an index, such as the Nasdaq-100.

ETFs are similar to mutual funds in that they both can provide exposure to broad areas of the market in a single investment. However, while mutual funds are priced once a day at the market close, ETFs can be bought and sold like individual stocks throughout the day.

Compared to mutual funds, ETFs tend to be more transparent, as well as lower fees on average.

Investors should be aware of the material differences between mutual funds and ETFs. ETFs generally have lower expenses than actively managed mutual funds due to their different management styles. Most ETFs are passively managed and are structured to track an index, whereas many mutual funds are actively managed and thus have higher management fees. Unlike ETFs, actively managed mutual funds have the ability react to market changes and the potential to outperform a stated benchmark. Since ordinary brokerage commissions apply for each ETF buy and sell transaction, frequent trading activity may increase the cost of ETFs. ETFs can be traded throughout the day, whereas mutual funds are traded only once a day. While extreme market conditions could result in illiquidity for ETFs. Typically, they are still more liquid than most traditional mutual funds because they trade on exchanges. Investors should talk with their financial professional regarding their situation before investing.

Important information

  • Investment involves risks. The value of investments, and any income from them, will fluctuate. This may partly be the result of changes in exchange rates. Investors may not get back the full amount invested. Past performance is not indicative of future performance.

    There are risks involved with investing in Exchange-traded Funds (“ETFs”), including possible loss of money. Index-based ETFs are not actively managed, and the return of index-based ETFs may not match the return of the Underlying index.  Actively managed ETFs do not necessarily seek to replicate the performance of a specific index. Both index-based and actively managed ETFs are subject to risks similar to those of stocks, including those related to short selling and margin maintenance requirements. Ordinary brokerage commissions apply. Equity risk is the risk that the value of equity securities, including common stocks, may fail due to both changes in general economic and political conditions that impact the market as a whole, as well as factors that directly related to a specific company or its industry.