What are ETFs?

If you’re looking to help diversify your portfolio, exchange-traded funds (ETFs for short) are an investment option worth considering. ETFs can offer a flexible and cost-effective approach to access a wide range of assets and markets.

What’s an ETF?

An ETF is like an investment bundle—they are funds that hold a basket of assets, such as stocks, bonds, or commodities. ETFs allow you to invest in a variety of securities all at once. They are traded on an exchange throughout the day just like individual stocks, and their prices change based on supply and demand.

How do ETFs work?

ETFs are often created to follow a theme or category (like an index, region, or industry). So when you invest in a single ETF, your money is being spread out across a bunch of investments that fall into that category.

For example, an ETF might track the S&P 500 index, which means it holds a portfolio of the 500 largest publicly traded companies in the US. If you buy that ETF, it's like buying a small piece of each of those companies. The performance of the ETF is determined by the price change of all those assets (whereas a stock's performance is tied to one single company). This can make ETFs an attractive choice for investors aiming to diversify their portfolios and potentially reduce their risk.

Types of ETFs

There are many kinds of ETFs available, each with varying characteristics. Here are some common types:

• Index ETFs track a particular index like the S&P 500 (can also be referred to as index funds).
• Sector ETFs follow a specific sector or industry, such as technology or healthcare.
• Commodity ETFs track the price of a certain commodity like gold or oil.
• Bond ETFs monitor the performance of a particular type of bond, such as government or corporate bonds.
• International market ETFs are made up of foreign securities and may provide exposure to global economic trends.
• Style ETFs track specific investment styles, such as growth, value, or dividend investing.
• Actively managed ETFs are operated by professional investment managers with the goal of beating the market and outperforming passively managed funds (which simply track the market).

Advantages of ETFs

• Diversification: Since ETFs are funds containing many securities bundled together, they naturally help diversify (some more than others).
• Cost-effectiveness: ETFs come with a fee called an “expense ratio” that covers the costs of managing the fund. But because of how ETFs are structured, their expense ratios are sometimes fairly low (particularly if they are passively managed).
• Tax Efficiency: ETFs may be more tax-efficient than other funds, in part because they tend to make fewer changes to their holdings.
• Flexibility and Liquidity: ETFs can be bought and sold throughout the trading day, so you know the price you’re paying and have the opportunity to respond quickly to changes in the market.
• Transparency: ETFs generally disclose what’s in the fund on a daily basis, which can help you make more informed investment decisions.

Read more: Comparing ETFs and mutual funds

Disadvantages of ETFs

• Lack of customization: ETFs can’t be personalized. Since they are premade, you’re not involved in what the funds invest in. Before buying an ETF, you may want to make sure you’re comfortable with what’s in it.
• Not all ETFs may be right for you: With so many different types of ETFs available, consider carefully evaluating what’s in them prior to making a decision. Just because something is called an ETF doesn’t mean it’s very diversified or a low-risk investment (an ETF could consist of similar high-risk stocks, for example).
• Fees and potential trading costs: While ETFs can be cost-effective, they do typically still have management fees (expense ratios). Some brokerages may also charge additional commissions when trading ETFs, but you don’t pay those with the Plynk app.

Next steps to consider

Curious to see what’s out there? There are close to 2,000 ETFs available in the Plynk app.

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