ETF Investing Explained by GIFs
ETFs have been one of the most polarizing investments since the burst on to the scene over 20 years ago. But sometimes, trying to describe these funds and how they operate can be a little dry. We decided to spice things up and highlight some of the most crucial points surrounding ETFs using animated GIFs. Check out our list below:
There’s an ETF for That
It’s easy to get excited about ETFs, as these days, there is one for just about everything you could possibly want. From broad S&P 500 exposure to funds focused on Nigeria, the ETF world casts a vast net over the investing world. And that fact only figures to ring more true as issuers continue to push the envelope with new funds.
Never Judge an ETF by Its Cover
Taking an ETF at face value based its name or index can be a mistake. Investors always should look under the hood of their fund to ensure that they are fully aware of what they are investing in. This is especially important when it comes to country and sector exposures.
You Have Been Overpaying for Mutual Funds
Plain and simple, for a majority of mutual funds out there, one can find an ETF alternative that is more cost efficient. ETFs will never charge load fees or have stipulations regarding minimum investments. Not to mention the fact that the average ETF cost is about half of that of the mutual fund world.
ETFs can Trade Commission-Free
As noted above, one of the biggest selling points of the ETF world is cost efficiency. Not only are a handful of ETFs in a constant battle to charge the lowest fees, but a wide variety of funds can be traded commission-free on a number of platforms. Anyone who is deeply invested in the mutual fund world can more than likely save money by switching over to ETFs.
Don’t Forget About Tax Advantages
Certainly an attribute worth praising is the tax efficiency of a ETFs. Though there are some funds that have complex structures, the lion’s share of the ETF world has a simplified tax structure that is often preferable to holding the underlying assets individually.
Always Use Limit Orders
This one is a bit more boring and is something we have stressed on numerous occasions over the years, but it is worth repeating: Never use market orders when investing in ETFs – limit orders are your friend and the best way to execute a position. This is especially true when it comes to ETFs with less liquidity, as bid-ask spreads can widen and a market order can leave you on the wrong side of a trade.
As is the case with any new style of investing, ETFs have been the subject of harsh criticism since the first fund launched in 1993. But in that time, a number of rumors and false allocations have been kicked up, and some of them have stuck around (for instance, an ETF cannot collapse despite what has been reported in the past). Be sure you know the facts before coming to any conclusions about the industry.
Be Careful With Leverage Funds
Leverage funds were designed for active traders who have ample knowledge of the risks associated with investing. They are not meant for the average retail investor. For those who are inexperienced, your position can quickly turn messy. For those who do use leveraged funds, take special care and be sure you fully understand just how quickly you can lose (and make) money.
Choose Advisors Wisely
Some investors may choose to go with a financial advisor or active management in their portfolios, which is perfectly acceptable. But, you should always keep in mind that most active managers fail to beat their underlying index each year, as passive investing has proven to be a strong route for the majority of investors. Do not let a good sales pitch or lofty promises suck you in to anything you are uncomfortable with.
It’s a Marathon, Not a Sprint
While there are a number of trading products, the majority of the ETF world is designed for long term investors. Along with that comes the necessity for patience. Always keep in mind your specific time horizon and, especially for long-term investors, do not lose patience and make a foolish decision.
Always Act, Never React
This applies to investing as a whole, with the idea being that as a long-term investor, you should always be acting and not reacting. Reacting to the stock market is a great way to lose money. While there are obviously certain events that you cannot predict, doing diligent research and sticking to your convictions will keep you from a nasty surprise or an overreaction to a situation.
There are Plenty of Free Resources at Your Fingertips
Here at ETFdb, we have a handful of free resources to make your ETF investing easier, including our comprehensive Screener, Country Exposure tool, and Performance Visualizer among other things. Take advantage of the capabilities at your fingertips.
Follow me on Twitter @JaredCummans.
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Disclosure: No positions at time of writing.