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ETF Trading Explained – What Are ETFs & How They Work

In this beginner friendly guide ETF Trading explained, we will take you on a journey of all things ETFs; starting with what are ETFs, how ETFs work, touch on the concept of leveraged ETFs, and then sharing 10 of the best ETF to invest in at this time.

What Are ETFs?

What are ETFs

An exchange-traded fund (ETF) is a type of investment fund that holds a basket of assets, such as stocks, bonds, or commodities, and trades on a stock exchange. You can gain exposure to all assets inside the basket in one transaction.

ETFs, as indicated by the name, are traded on stock exchanges, and they offer investors a way to get exposure to a particular market or asset class without having to buy the underlying assets themselves.

How Do ETFs Work?

ETFs are traded on stock exchanges, and their prices fluctuate throughout the day as trading activity ebbs and flows.

Like stocks, ETFs can be bought and sold any time the market is open. And like stocks, ETFs have ticker symbols that allow investors to track their performance. As an ‘exchange traded fund’, this means that liquidity when trading ETFs is high.

Do ETFs pay dividends?

Many ETFs do pay dividends, though not all. Dividends are paid out by the underlying companies that make up the ETF’s holdings, and then distributed to shareholders.

For example, if an ETF holds a basket of dividend-paying stocks, the fund will likely distribute those dividends to shareholders on a quarterly basis. If you hold an ETF that does not include dividend paying assets, you are unlikely to receive dividends from the fund.

Are ETFs safe?

Investing in, or trading ETFs is subject to the same risks as the underlying assets they hold. For example, if an ETF tracks a basket of stocks, it will be subject to the same risks as owning those stocks outright.

However, because ETFs are diversified and professionally managed, they can offer investors a degree of protection against some of these risks. The risk of holding a basket of stocks over a single stock is reduced by diversification, and the same holds true when investing in ETFs.

As ETFs are listed, there is also the element of regulation by the underlying stock exchange that the assets are held on. Each of the global exchanges will have its own regulator, and this provides a level of safety that the assets held are accountable to regulatory scrutiny.

This means that US ETFs such as the SPY are composed of SEC monitored listed companies, and the best UK ETFs will be under the scrutiny of the FCA for example. The same holds true for ETFs in Malaysia, and those of companies comprised from South Africa or India.

You also reduce some of the personal trading risk that is associated with your own trading psychology by placing your funds in an exchange traded fund, as it removes a lot of the stock picking elements, and equalizes things.

Potential Advantages Of ETF Trading

ETF Trading delivers live pricing, in the same way as stock tickers
ETF Trading delivers live pricing, in the same way as stock tickers

Investing in ETFs, and ETF trading, have become increasingly popular in recent years as they continue to offer a number of advantages over other types of investment funds.

For one, ETFs tend to be much more cost-effective than traditional mutual funds. This is because ETFs are not actively managed, so there are no management fees to pay. Additionally, ETFs often have lower expense ratios than mutual funds, meaning that more of your money goes towards actual investment rather than paying for fees.

Another advantage of ETFs is that they are very flexible and can be traded in a number of different ways. For example, you can trade ETFs through a brokerage account, or you can use them to help diversify your portfolio.

Additionally, ETFs can be traded on margin, meaning you can trade leveraged ETFs to amplify your investment. ETF CFD trading is provided by many brokers these days, as the demand for access continues to grow.

If you are interested broadly in how to trade various financial assets, you can find a whole host of resources available here.

ETFs Vs Mutual Funds

ETFs and mutual funds are both types of investment vehicles that can be used to achieve different financial goals. While they share some similarities, there are also some key differences between the two.

One key difference is that ETFs can be traded throughout the day on a stock exchange, whereas mutual funds can only be bought or sold at the end of the trading day. This means that investors looking to quickly take advantage of market movements may prefer to trade ETFs.

It can be said then that ETFs offer the diversification of a mutual fund but with the flexibility of trading individual stocks. This means that you can tailor your portfolio to your specific investment objectives.

Another difference is that ETFs often have lower fees than mutual funds. This is because ETFs tend to be passively managed, meaning that they track an underlying index rather than being actively managed by a fund manager.

ETFs also tend to be more tax-efficient than mutual funds. This is because mutual fund distributions are typically taxed as capital gains, whereas ETF distributions are taxed as ordinary income. This should be considered with a tax professional as there are different rules depending on where in the world you are based, but the above in general usually holds true.

If you’re thinking of trading ETFs, there are a few things you should keep in mind. First, it’s important to understand how ETFs work and what you’re investing in. Second, make sure to do your research and choose an ETF that fits your investment goals. And finally, remember that ETFs are subject to market fluctuations, so it’s important to monitor your position and be prepared for changes in the market.

Best ETF To Invest In Top 10 List

ETFs vs Mutual Funds

There is no simple way to formulate this list, as the best ETF to invest in for you will depend on your investment goals and risk tolerance. However, below we’ve compiled a list of 10 of the best ETFs to invest in, based both on past performance and future potential.

1. SPDR S&P 500 (SPY)

The SPY ETF is a fund that tracks the performance of the S&P 500. Whilst this could also be considered as an index fund, in this format, it is offered as an ETF. The S&P 500 is a good barometer of general US economic health and has been proven to outperform many other markets over a large period of time. The expense ratio for SPY is also very low at 0.0945%.

2. Invesco QQQ Trust (QQQ)

The QQQ ETF tracks the performance of the NASDAQ-100, an index made up of 100 of the largest non-financial companies listed on the NASDAQ stock exchange. The QQQ has a strong track record and has outperformed the S&P 500 over the past 10 years. The expense ratio for QQQ is 0.20%.

3. iShares Core U.S. Aggregate Bond (AGG)

The AGG ETF is a bond fund that invests in a wide range of US government and corporate bonds. This makes it a good choice for investors looking for stability and income. The AGG has a low expense ratio of 0.08%.

4. Vanguard Short-Term Corporate Bond (VCSH)

The VCSH ETF is a bond fund that invests in short-term US corporate bonds. This makes it a good choice for investors looking for stability and income with less interest rate risk than longer-term bond funds. The expense ratio for VCSH is 0.07%.

5. SPDR Gold Shares (GLD)

The GLD ETF tracks the price of gold, making it a good choice for investors looking to hedge against inflation or market volatility. The expense ratio for GLD is 0.40%.

6. iShares 20+ Year Treasury Bond (TLT)

The TLT ETF is a bond fund that invests in long-term US government bonds. This makes it a good choice for investors looking for stability and income with less interest rate risk than shorter-term bond funds. The expense ratio for TLT is 0.15%.

7. Vanguard Dividend Appreciation (VIG)

The VIG ETF tracks the performance of the Dividend Aristocrats, a group of companies that have increased their dividends for at least 25 consecutive years. This makes it a good choice for investors looking for stability and income. The expense ratio for VIG is 0.08%.

8. iShares 7-10 Year Treasury Bond (IEF)

The IEF ETF is a bond fund that invests in intermediate-term US government bonds. This makes it a good choice for investors looking for stability and income with less interest rate risk than longer-term bond funds. The expense ratio for IEF is 0.15%.

9. iShares iBoxx $ High Yield Corporate Bond (HYG)

The HYG ETF is a bond fund that invests in high-yield, or junk, US corporate bonds. This makes it a good choice for income-seeking investors with a higher tolerance for risk. The expense ratio for HYG is 0.48%.

10. SPDR Bloomberg Barclays International Treasury Bond (BWX)

The BWX ETF is a bond fund that invests in a wide range of government bonds from around the world. This makes it a good choice for investors looking for stability and income with less interest rate risk than US-focused bond funds. The expense ratio for BWX is 0.45%.

The above list is by no means exhaustive, but these are 10 of the best ETFs to buy based on past performance and future potential. As always, it’s important to do your own research before investing in any ETF, and to consult with a financial advisor if you’re not sure which ones are right for you.