Lets face it. Stocks is not for everyone. Alot of research has to be done before you indulge yourself into buying a stock. You need to go over the fundamental and the technical analysis. What is the EPS, P/E, PEG, Market Cap, Dividend, ROC, MACD…the list is end. Obviously you dont have to be a rocket scientist to buy stocks, but without the research it would be pure gambling.
What if i told you, there is another option for those investors who would love to make some money in the stock market but at the same time do not want to spend time analyzing stocks ? If you are that person, Exchange-traded funds (ETFs) may be right for you. ETFs also hold an advantage over mutual funds. Interesting isnt it. Read on…
What Is an ETF?
Think of an ETF as a mutual fund that trades like a stock thus experiencing price changes throughout the day as it is bought and sold. You can short sell them or buy them on margin as well. ETF tracks an index, a commodity or an index fund.
ETFs offer diversification, high trading flexibility, low expense ratio and tax efficiency in a flexible investment. An ETF does not have its net asset value (NAV) calculated every day like a mutual fund does. When buying and selling ETFs, you have to pay the same commission to your broker that you’d pay on any regular order.
Varieties of ETFs
The first exchange-traded fund was the S&P 500 index fund. There are hundreds of ETFs trading on the open market ranging from sector-specific, country-specific and broad-market indexes. You can pretty much find an ETF for just about any kind of sector of the market.
- If you are interested in the healthcare sector, Vanguard’s Health Care Viper VHT would be worth looking into.
- If you would like exposure to the emerging market, then take a look at iShare MSCI Emerging Market Index EEM. Similarly if you are interested in any country’s index, like say Brazil, you can follow the iShare MSCI Brazil Index EWZ
- If you’d like exposure to the internet infrastructure sector, then maybe Internet Infrastructure HOLDRS IIH might be for you.
Below you will find a closer look at some of the more popular ETFs:
Nasdaq-100 Index Tracking Stock (QQQQ)
As the name suggests, this EFT consists of the 100 largest and most actively traded non-financial stocks on the Nasdaq. QQQQ
offers broad exposure to the tech sector. Because it curbs the risk that comes with investing in individual stocks, the QQQQ is a great way to invest in the long-term prospects of the technology industry.
SPDRs – Spiders
Imagine trying to buy all 500 stocks in the S&P 500. How crazy that would be ? SPDRs allow individual investors to own the index’s stocks in a cost-effective manner. You can trade the S&P Index 500 (SPY) on the AMEX. Another nice feature of SPDRs is that they divide various sectors of the S&P 500 stocks and sell them as separate ETFs. Here is the list of ETFs for various sectors.
The energy sector SPDR index XLE invests in industries, such as energy equipment and services, and oil and gas services, among others. The technology sector SPDR index XLK invests in industries, such as communications equipment, computers and peripherals, electronic equipment and instruments, telecommunication services, semiconductor equipment and products, information services, Internet software and services and software, office electronics.
iShares is Barclay’s brand of ETFs. Barclay has put out a number of technology-oriented iShares that follow Goldman Sachs’s technology indexes trading on the AMEX.
VIPERs are Vanguard’s brand of EFTs. Vanguard also offers ETFs for many different areas of the market including the financial, healthcare and utilities sectors.
Diamonds Trust DIA tracks the Dow Jones Industrial Average. The fund is structured as a unit investment trust.
A great reason to consider ETFs is that they simplify index and sector investing in a way that is easy to understand. If you feel a sector is going to do well in the near future, go buy it. If however, you think that a sector is going to slump, go short it.
The combination of diversification, low cost, tax efficient and the flexibility that ETFs offer, makes them attractive trading options. They are easy to understand and easy to use, and they are gaining in popularity at such a rapid pace that some experts anticipate that they will one day surpass the popularity of mutual funds. If ETFs haven’t found a place in your portfolio yet, there is a pretty good chance that they will in the future.
You can also view a small video explaining ETFs.
To be continued…
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Which sector are you in ??