Investment can be a tricky activity, especially if you have a lot on your plate and can’t dedicate too much time to supervising your portfolio. If an investment option that matches market index returns without taking up too much of your time is what suits you, then your best bet is to invest in ETFs.
What is an ETF?
Exchange traded funds, or ETFs, are securities that will track an index, a commodity, or any other asset, but are treated on the stock exchange in the same way as any other stock option. You can use ETFs to match the performance of commodities or even a collection of securities and get returns similar to those on the market index.
ETFs are very similar to mutual funds, with the difference being that ETFs are exchangeable – that is, they can be bought and sold on the market like other stock options – and they are more liquid and cost-effective than mutual funds.
Building Wealth with ETFs
So now you know what they are, but how do you use ETFs to build your wealth?
Since ETFs hold multiple underlying assets – unlike any individual stock, which holds just one – they are great for diversifying your investment portfolio and reducing the amount of risk you are exposed to at any given point. ETFs can also provide stability to your portfolio and are passive investments that require very little management and thus, have fewer associated expenses.
ETFs also have the potential to provide higher returns than other assets like fixed deposits or government securities that often have fixed returns. In fact, ETFs that are tracking a market index can also have the capacity to beat mutual funds, if given enough time. Investing in ETFs does take some time since they are a long-term investment, but their low associated cost, along with their potential to generate high returns, makes them a popular option for many investors.
There are different kinds of ETFs you can invest in:
- Bond ETFs , where income distribution is dependent on the performance of bonds. These bonds do not have a maturity date.
- Stock ETFs, which are baskets of stocks, usually from a single industry or sector.
- Industry ETFs, which focus specifically on one sector or industry. This is usually to bring about awareness to the benefits of investing in such an industry, such as the tech sector in recent times.
- Commodity ETFs, where investments are made mostly in commodities,
ETFs are available on most investing platforms nowadays due to their rise in popularity. But, it is important to research the ETF before investing in it. You want to make sure that the sector or industry it functions in will be beneficial. You also want to make sure your ETF has a low cost ratio than others, as well as the fact that your ETF is able to replicate the market index. Ideally, investing in ETFs that are exchanged daily will help you with staying liquid.
EFTs allow you to passively generate wealth at a lower cost and delivers well over the long term.