Main Benefits of Trading ETFs

ETFs, or Exchange Traded Funds, are becoming more and more popular over the past few years. What began with just a handful of funds has become its own niche of investment with hundreds of funds which cover a variety of sectors and indexes.

In this article, I'll share with you some of the main benefits of trading ETFs and why I believe that you should make them an integral part of your investment portfolio.

But first, what is an Exchange Traded Fund?

An ETF is an investment tool that shadows a basket of stocks or bonds. Usually, these stocks or bonds belong to a market index or a business sector. The ETF will usually shadow the price movements of this basket of stocks and bonds. For instance, an S&P 500 ETF will follow the price movements of the actual S&P index. This is done by actually buying shares of the 500 companies in the S&P 500 in direct proportion to their weight in the index.

These 500 stocks change prices and so the price of the ETF changes as well. By investing in the ETF, you're actually investing in the S&P 500 directly without having to buy all the stocks yourself.

The main benefit of using ETFs is to diversify risk. When you hold one stock you're basically placing all your eggs in one basket. Even if you hold 10 different stocks, this can still be risky. An ETF allocates your investment automatically for you among many stocks so that your risk is spread around. You're less exposed to big reduction in value.

Naturally, you can buy the 500 stocks of the S&P yourself but it can be hard work to keep track of them all. By investing in a sinlge ETF you're reducing risk and making things easier on yourself.

You may ask yourself why you can't invest through an S&P 500 mutual fund? The reason is that ETFs are traded continuously while mutual funds are traded once a day. In addition, the costs of mutual funds are generally higher than those of ETFs.

So, an ETF provides an affordable way to diversify your risk. You can trade them just as you would a stock but you're not placing a bulk of your money on a single stock or bond. You're investing in a variety of businesses. This is a smart and affordable way to trade.