Investing

Investing with Exchange-Traded Funds (ETFs)

Guest post by Ori Tal III. Check out the Ori Tal Flicker Account.

Exchange-traded funds, or ETFs, are a type of investment vehicle that capitalizes on the robustness of the stock market as a means of generating profit for investors. The popularity of the ETF stems from many advantages that are unique to these types of funds. Not surprisingly, it is these advantages which helped push ETFs into the mainstream as a viable investment asset allowing investors to further diversify their portfolios to manage risks without compromising profitability. 

At its core, an ETF is only slightly different from the conventional stock market asset in that it is still actively managed and traded throughout the trading day. What’s different, however, is that an ETF can be formed from a composite of other interrelated assets and not just based on one specific stock, bond or commodity. For example, an ETF can be formed by tracking the combined value of tech stocks so instead of just being dependent on, say Apple, the ETF price can also be buoyed by stocks from companies like Google, Facebook, Microsoft, Intel, and some others. 

From here, it is easy to see why investing with exchange-traded funds can be an attractive venture for many astute investors. First, the fact that it can be traded like stocks make it an active asset which can be bought and sold within a moment’s notice allowing investors to leverage price fluctuations to yield a profit. Second, the fact that it is based on a composite of assets and securities makes it less vulnerable to typical stock market issues that are prevalent with many stock prices. Third, government regulations have put a premium on investing in ETFs giving it considerable tax advantages over other types of investment. In many countries such as in the United States, the earnings from ETF investment are taxed at a lower rate than earnings from similar stock market assets. 

Moreover, the idea of the ETF being based on commodities opens up tremendous opportunities for investing in these “commodities” without having to buy the actual asset themselves. ETFs in the gold and silver sector, for example, are particularly attractive. Most gold and silver ETFs closely track the spot price of gold and silver – the ETF appreciates if gold goes up and depreciates if gold price comes down. This means that one can leverage the price movement of precious metals without actually having to buy these metals, store them, and sell them again when the price has appreciated. 

It also helps that most ETFs are priced lower than the per unit price of gold, silver, platinum, and palladium amongst others. Most gold ETFs trade in the $30 to $50 range while the price of gold is about $1,700 currently. If you don’t have thousands to invest in gold, the ETFs become a much-welcome substitute. 

All told, exchange-traded funds open up a new dimension in stock market investing previously not possible with just stocks or mutual funds. It opens the door for more diverse and versatile investment opportunities. Check it out to see if you can use it to grow your portfolio by taking advantage of the global economic recovery.

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