ETFs: How to easily invest in hundreds of companies
Lesson 3
14.09.2023
To buy one stock each of Microsoft, Apple and Google, you need more than 500 dollars. And how much would it take to invest in the entire breakthrough IT sector of the United States - thousands? Tens of thousands? No, you need a few hundred, and sometimes even less, and this at lower risks than if you buy stocks individually. The impossible becomes possible with ETFs - or simply exchange-traded funds.
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What you'll learn
What you'll learn
1. How ETFs are structured.
2. What principle ETFs use to select securities.
3. Which ETFs are smart to invest in.
2. What principle ETFs use to select securities.
3. Which ETFs are smart to invest in.
How ETFs are organized
How ETFs are organized
ETF stands for Exchange Traded Fund - "Exchange Traded Fund". It is a basket of dozens, or even hundreds of securities, collected according to a certain characteristic - from one industry or country. Most often ETFs simply duplicate one of the world indices, such as the Dow Jones Industrial Average or Nasdaq. The management company that created the ETF buys assets in its portfolio in the same proportion as in the index, and then sells shares (units) in the fund on the stock exchange as ordinary shares.
Thus, by buying one ETF, an investor invests in several companies at once. For example, XLK (Technology Select Sector SPDR Fund) includes many stocks of U.S. technology companies, including such IT giants as Apple, Microsoft, NVIDIA, and so on. Instead of buying all of these stocks individually, you can buy a share of XLK stock - much easier and cheaper.
Thus, by buying one ETF, an investor invests in several companies at once. For example, XLK (Technology Select Sector SPDR Fund) includes many stocks of U.S. technology companies, including such IT giants as Apple, Microsoft, NVIDIA, and so on. Instead of buying all of these stocks individually, you can buy a share of XLK stock - much easier and cheaper.
The value of an ETF is constantly changing because the value of the securities in its portfolio changes. As the value of the fund changes, so does the price of the fund's shares. If the fund is down in value, the stock will go down in price. And if it goes up in value, it will go up.
The price of an ETF will be affected by the commission charged by the Management Company. Therefore, the price of an ETF does not change by exactly the same percentage as the fund's portfolio, but slightly less.
The commission is stated as an annual percentage of the amount of the fund's assets. The commission does not have to be paid separately - it is built into the share price of the fund and reduces it not once a year, but every day and a little bit at a time.
In the U.S., management company fees average about 0.5% per year of a fund's asset value. At funds such as Vanguard or BlackRock, fees can range from 0.03% to 0.7% per year.
The price of an ETF will be affected by the commission charged by the Management Company. Therefore, the price of an ETF does not change by exactly the same percentage as the fund's portfolio, but slightly less.
The commission is stated as an annual percentage of the amount of the fund's assets. The commission does not have to be paid separately - it is built into the share price of the fund and reduces it not once a year, but every day and a little bit at a time.
In the U.S., management company fees average about 0.5% per year of a fund's asset value. At funds such as Vanguard or BlackRock, fees can range from 0.03% to 0.7% per year.
What ETFs are available
What ETFs are available
By asset type, ETFs are divided into stock funds, bond funds, commodity funds (such as gold funds) and mixed funds, which include several types of assets at once.
Equity ETFs are considered the most profitable. They can also be the riskiest, especially during an economic crisis. Bond and gold ETFs can reduce risks and protect your portfolio.
In the period of economic growth, companies' income grows, and with it their shares. In a crisis, bonds will become more expensive because coupons are paid on them, and during instability the demand for regular payments increases. Gold will protect against inflation, because this precious metal does not succumb to corrosion and its reserves are limited, which means that its value will be preserved in the future. Of course, there are exceptions to the rules, but in general, the financial market works in this way.
Available ETFs can be viewed on the mobile app.
Equity ETFs are considered the most profitable. They can also be the riskiest, especially during an economic crisis. Bond and gold ETFs can reduce risks and protect your portfolio.
In the period of economic growth, companies' income grows, and with it their shares. In a crisis, bonds will become more expensive because coupons are paid on them, and during instability the demand for regular payments increases. Gold will protect against inflation, because this precious metal does not succumb to corrosion and its reserves are limited, which means that its value will be preserved in the future. Of course, there are exceptions to the rules, but in general, the financial market works in this way.
Available ETFs can be viewed on the mobile app.
What's so great about ETFs
What's so great about ETFs
Affordable price
One share of an ETF is usually worth a few dollars or tens of dollars.
One share of an ETF is usually worth a few dollars or tens of dollars.
Simplicity
It takes a novice investor a lot of time to put together a competent investment portfolio. It is necessary to analyze the market, choose the best stocks, and then monitor the state of each company and, if necessary, add and remove something.
By choosing an ETF, you get a ready-made portfolio that invests in an entire market or sector at once.
It takes a novice investor a lot of time to put together a competent investment portfolio. It is necessary to analyze the market, choose the best stocks, and then monitor the state of each company and, if necessary, add and remove something.
By choosing an ETF, you get a ready-made portfolio that invests in an entire market or sector at once.
Transparency
The fund structure is available on the management company's website and is usually updated once a day. For Vanguard or Fidelity exchange-traded funds, portfolio composition and structure, as well as all ETF transactions, are disclosed in real time.
The fund structure is available on the management company's website and is usually updated once a day. For Vanguard or Fidelity exchange-traded funds, portfolio composition and structure, as well as all ETF transactions, are disclosed in real time.
What about dividends and coupons
What about dividends and coupons
Funds receive dividends and coupons from the stocks and bonds they own. Most funds available on the New York Stock Exchange (NYSE) and NASDAQ use this money to buy additional securities - and then the fund's own share price rises further: for every share of the fund, there are now more securities.
But some funds don't use the income to buy assets, but pay dividends to investors. Now, of all the ETFs on the NYSE or NASDAQ, for example, SPY, a fund of U.S. company stocks that tracks the S&P 500 index, does this.
But some funds don't use the income to buy assets, but pay dividends to investors. Now, of all the ETFs on the NYSE or NASDAQ, for example, SPY, a fund of U.S. company stocks that tracks the S&P 500 index, does this.
Bottom line
Bottom line
- ETFs are a great way to invest in many assets in the U.S. market at once, but without spending a lot of money.
- Investing in ETFs is safer than investing in individual securities: there is less risk of losing money. But even ETFs cannot eliminate risk completely.
- The most common ETFs in markets like the NYSE and NASDAQ are stock and bond funds. There are mixed ETFs that invest in stocks, bonds and gold at the same time. These ETFs can help you make money under any conditions, whether the economy is growing, stagnating or declining.
- ETFs aren't primarily about dividends, but about driving up the stock price of the fund itself.
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