Exchange Traded Funds (ETFs) are either actively managed or indexed investment funds comprising of a stocks basket of a number of different companies traded on the markets. ETFs are traded on the stock exchanges like shares of the companies.
The main advantage of ETFs is that they are very low cost compared to other investment funds. Their annual fee is around 0.5% of the value, but you have to pay a commission for trading ETFs. But of late, many institutions have even stopped levying the trading commission on ETFs.
ETFs are also more flexible than other mutual funds as it is possible to sell them almost instantly on the stock exchange and get money in case of an emergency. In some ETFs, you can get the closing price even if you traded earlier in the day.
ETFs are good for speculative, short-term investment gains. You can use ETFs to take advantage of the market conditions. You can even short them and make some quick money if you know where the stock basket is heading. But do it only if you are very sure, else you may just end up making huge losses.
A number of ETFs give twice or thrice as much return (or losses) as stocks. Such ETFs can be even more volatile than stocks themselves. Some ETFs invest in very small obscure markets and you should generally keep away from such funds. I would advise you to look for a low cost ETF that invest in a diverse portfolio, as it is likely to less risky.
A basic ETF is a good option as its portfolio is broad based like that of any other mutual fund. For example, Vanguard Total Stock Market ETF invests in US stocks and iShares, and MSCI EAFE Index fund invests in overseas large scale companies.
Another good option is inflation hedged ETFs whose prices are indexed to TIPS (Treasury Inflation Protected Securities), which are Treasury bonds that provide hedge against inflation.
You can also put a part of your money in sectoral ETFs. These would involve higher risk than basic ETFs, but can increase your return if your investment proves right.
ETFs are good investment options as they help you save hundreds of dollars that you normally would have given as fees to the fund managers. Low costs and good returns have made ETFs very popular with investors.
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