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3 Reasons to Consider Before Investing in ETFs

An Exchange-Traded Fund (ETF) is a type of security made up of multiple different assets. An ETF’s composition may include stocks, commodities and bonds, for example. As the name suggests, Exchange-Traded Funds are traded on stock exchanges just like regular stocks. Fund providers own the underlying assets that compose the ETF, design a fund to track their performance, and then sell shares in that fund to investors through a stock exchange.


ETFs can have many different strategies, but often try to replicate the performance of an underlying index.  For instance, the SPDR S&P 500 ETF (NYSEARCA:SPY) tracks the S&P 500 index. This ETF is a “basket” of securities that trades on the NYSE Arca exchange.


In this post, we’ll go over a few benefits of investing with ETFs. There are drawbacks, however, including trading costs and learning the complexities of the product. Keep in mind that we are not making recommendations - this content serves strictly informational purposes.



Diversification 

Suppose an oil company has a spillage happen in one of their rigs. If, at the time of the spillage, you are holding the company’s stock, you are exposed to that company’s unsystematic risk, and might suffer from the loss of value of that company’s stock. However, if you are holding an ETF which tracks the energy industry’s performance instead, your loss might not be as big.


Keep in mind that diversification does not guarantee investors will not lose money and this kind of investment strategy doesn’t make portfolios immune to risk. Moreover, although diversification can reduce risk, it can also reduce reward. By reducing your exposure to any single investment and protecting you on the downside, diversification limits you on the upside as well.


  

Sectorial Exposure 

By investing in a semiconductor ETF, for instance, you can have exposure to the entire semiconductor industry without having to buy shares from various companies. As mentioned,  investing in an ETF can provide the advantages of holding a variety of assets with the ease of trading a single security, which may favor investors seeking sectorial exposure. 

Convenience

Investing in an ETF can be more practical and affordable than holding a variety of equities. The more assets you hold, the more time and effort you’ll likely have to spend monitoring which investments are doing well and which aren’t.

A handful of ETFs on their own can provide exposure to different countries, sectors and asset classes, whereas you would likely need to invest in dozens of individual company stocks to achieve the same level of diversification. 

 

How to invest in ETFs on Passfolio

Passfolio’s mobile app and web platform let people in over 170 countries invest in United States stocks, ETFs, and REITs using their local currency and transfer methods.


There are hundreds of ETFs to choose from with Passfolio Securities. Just access the search tab and search for the ETFs you think are most compatible with your investment strategy and goals. Passfolio lets you choose to either input how many shares you want to purchase or type in how much you want to invest in USD. To get started, sign up here!

¹ Please see our fractional shares disclosure.

² Securities less than $5 cost $0.02/share. Please see our disclosures on other charges.

Please read important legal disclosures that apply to your relationship with Passfolio.

 

Investors should consider the investment objectives, risks, and charges and expenses of an Exchange Traded Fund ("ETF") carefully before investing. Before investing in any ETF, you should consider its investment objective, risks, charges and expenses. Contact us at support@passfolio.us for a prospectus containing this information. Read it carefully. ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses. ETF shares are bought and sold at market price, which may be higher or lower than their NAV, and are not individually redeemed from the fund. Investment returns will fluctuate and are subject to market volatility, so that an investor's shares, when redeemed or sold, may be worth more or less than their original cost. ETFs are subject to risks similar to those of stocks. Some specialized exchange-traded funds can be subject to additional market risks. Leveraged and inverse exchange-traded products are not designed for buy and hold investors or investors who do not intend to manage their investment on a daily basis. These products are for sophisticated investors who understand their risks (including the effect of daily compounding of leveraged investment results), and who intend to actively monitor and manage their investments on a daily basis.


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