ETF in english means “Exchange Traded Funds“.
What is an ETF ?
ETF Exchange Traded Funds are securities that can be bought and sold on the stock exchanges around the world.
ETFs consist usually of companies from different sectors or it simply copies the performance of certain stock exchange indices like Standard & Poors 500 or NASDAQ 100. Investors like them because by buying ETF they can both save on fees and mitigate risk. Buying just one ETF, gives you the opportunity to invest in hundreds of quality companies at the same time.
ETFs are traded on Stock Exchange just like stocks.
We have introduced you to the basics of stock investing in our past articles. ETF investing represents one of the best opportunities for passive investors to gain exposure to the broad market and gain positive returns in the long run. On the other hand, individual stock picking can be relatively challenging for an average investor due to the nature of stocks.
What to do if you don’t have time to choose and tracking individual titles, or you will not want to choose one after one?
The solution may be regular passive investing in broad market ETF funds.
Why are ETFs good for passive investing
- Simply because you don’t have to waste your time by analyzing financial results of companies and constantly buy and sell. Instead you buy long term, hold and rebalance once a year. Thats it. So simple.
- Second reason are low fees. Most often you will pay between 0.07% to 0.6% p.a. fee to the company managing the index fund. This fee is maintnance fee and is deducted from the performance of the fund once a year.
- Third reason is that in many countries investing into ETF is tax efficient. In many countries you will not pay any capital gains tax on the profit from selling ETF after certain time. It is so called time test.
Profitable ETF portfolio ideas
Most people up to age of around 50 should invest into stock ETFs. The older you get, the more bond ETFs you should have in your portfolio in order to mitigate the stock market crash risk.
If your risk appetite is not big, you could go with 80/20 portfolio which means 80% stock ETFs and 20% bond ETFs.
In table below we present you with our own portfolio of liquid and safe ETF funds that might also fit into your ETF portfolio.
How to buy and sell ETFs
ETF represents a given basket of securities with a predetermined structure.
By far the most popular ETF is the famous SPY fund (SPDR) that tracks the performance of the whole USA stock market called S&P500.
As an example, one of the most famous ETF Fund is ETF that is copying the NASDAQ 100 technological companies, the fund is called QQQ and managed by Invesco.
By investing into QQQ you buy all technological companies that are part of NASDAQ 100. You can buy this ETF if you think that technology companies have a bright future ahead, but you do not know which specific company you should pick. So instead of stock picking between 100 great companies with lots of inovations, cash flows and growth, you buy QQQ or its European UCITS equivalent (more on that later).
Don’t look for the needle in the haystack. Just buy the haystack! – John Bogle (inventor of ETF and owner of Vanguard ETF)
Sector ETF vs broad market ETF
If you believe the banking sector has bright future , you can buy Bank ETF that is tracking biggest banks. Or if you think that Electric Vehicles have bright future you can invest into EV focused ETF containing companies like Tesla, Nio etc. Nowadays, there is a truly wide offer of these instruments with a preferred fee structure. In addition to sector ETF, there are also less known funds that invest in commodities or bonds.
However, sector funds may be riskier for an investor since they reflect the sentiment only in one small sector of the economy! Therefore we strongly recommend to track the whole market by investing into either worldwide stocks MSCI index fund or at least US focused SP500. We think such an investment vehicle is an ideal financial instrument, for long-term investment. For example the US stock market has been growing in average by 7% per year if we look at the past 50 years of performance.
ETF exchange traded passive funds beat up to 80% of actively managed funds in the long run!