How to invest in ETFs, why and when to choose this investment tool? Advice, advantages and risks of investing in exchange-traded funds.
How to invest in ETF?
An ETF (acronym for exchange-traded fund) is a tradable financial instrument that tracks an index, or a commodity, or a bond, or a basket of assets. This means that its value depends, since it "tracks", directly on the value of the quotation of the following asset, which takes the name of underlying. Don’t worry, everything will become clearer as you continue reading.
ETFs experience price changes throughout the day and are bought and sold continuously, just like stocks on the stock market.
They usually enjoy higher liquidity and lower interest rates than mutual funds, which makes investing in ETFs an attractive alternative for private investors.
| What is an ETF? An ETF is a diversified set of assets, like an investment fund, but traded on the stock market in a similar way to stocks. It can monitor the performance of stocks, bonds, indices or commodities. Like individual stocks, ETFs trade throughout the day at prices that change based on supply and demand. |
How to invest in ETFs
Money.it has created a beginner’s guide to explain in a simple and clear way everything you need to know to invest in ETFs, tools that allow you to access the liquidity of the stock market but also the diversification advantages of mutual funds .
1) Understand the basics
ETFs are baskets of securities that trade in the market during trading sessions as if they were shares and are designed to track an underlying index or other asset. They are similar to mutual funds, which however enjoy active management by those who manage them. This means that they can have many different stocks and assets, a bit like a mini-portfolio of investments.
Each ETF is generally focused on a specific industry, asset class or category. ETFs can be used to help diversify a portfolio or, for more experienced traders, to profit from daily price movements. Also, since ETFs trade on a market like stocks, it is also possible to take a "short" position, thus betting on the price going down.
One of the key differences between ETFs and mutual funds is intraday trading. Mutual funds have a price calculated at the end of the trading day, known as the net asset value or NAV. ETFs trade on the market during the day, so their price fluctuates continuously based on market supply and demand.
2) Choose the ETF to invest in
When choosing which ETFs to invest in, you need to carefully monitor the following factors:
- Liquidity: The ETF market is large and active and includes highly popular and traded assets. This feature makes it easy to enter and exit positions even if, remember, ETFs are inherently illiquid.
- Selection: There is a large variety of ETFs on different asset classes, such as stocks and bonds. You can also invest by fund, commodity, investment style, geography and more. Many ETFs are an innovative mix of different stocks.
- Diversity: Many investors find that ETFs are suitable for approaching markets they might otherwise not be able to invest in or trade. Because they are baskets of assets and not individual stocks, ETFs allow for a more diversified approach to investing in these areas, which can help reduce risk for many investors.
- Fees: ETFs charge a fee but, in general, an ETF tends to be cheaper than an actively managed mutual fund due to its passive indexed nature. This results in lower fees.
3) Choosing the broker to invest in ETFs with
Choose among the best brokers the one that best suits your needs, informing you about the availability of ETFs on which you can trade. A particular eye also to the type of platform that each intermediary includes in its offer. Make sure it is easy to understand by taking advantage of free demo accounts to test its effectiveness first.
| If you are already ready to invest in ETFs, you can open an investment account with XTB. Here you can buy and sell ETFs at any time, commission-free for a monthly turnover of up to EUR 100,000*! (*Transactions above this limit will be subject to a 0.2% fee, for a minimum amount of 10EUR) |
On XTB, using the built-in search function of xStation5 you can find the ETFs you want to buy and place a buy order. Make sure you check all your order details before completing this step.
4) Develop a trading strategy
Once you set your investment goals, ETFs can be used to gain exposure to almost any market in the world or any industry sector.
If you have substantial capital, you can invest in proprietary ETFs that track the performance of stock and bond indices, commodities or emerging markets.
If you’re looking to get in and out of the market quickly in hopes of catching short-term price swings, then you can too with contracts for difference (CFD) backed ETFs.
Like any other type of trading, it is important to develop and stick to a strategy that works, whether it is based on technical or fundamental analysis. Technical analysis focuses on the statistics generated by market activity, such as historical prices, volume and many other variables. Charts, indicators and other similar technologies are used. Fundamental analysis focuses on measuring the value of an investment based on economic, financial, and institutional data. Most investors use a combination of these two approaches.
Naturally, the strategy you choose will depend on the concentration and holdings within each ETF to which you are exposed. For example, a corporate bond ETF will depend on fundamental research, such as a company’s credit rating, past and future earnings, as well as the economic outlook for the relevant fund. An ETF that tracks a stock index, for example, needs a strategy based on the technicals of that index, or a fundamental analysis that focuses on how the stock market might be affected by the global economy, or a combination of both approaches.
Invest in ETFs or stocks?
ETFs offer the same key benefit that mutual funds have over investing in individual stocks: diversification. And that’s exactly what every investor needs. Over the long term, diversification reduces risk without impacting returns.
If you have a strong belief in the future success of an industry, a good strategy might be to buy an ETF that tracks the industry index. In this way, you are protected from the volatility that some companies in the sector can be subject to. Plus, make just one transaction, saving on commissions.
Invest in ETFs or Mutual Funds?
Mutual fund managers aren’t all that different from the average investor: Most of them don’t beat the market. The fact that an ETF is indexed, therefore, ensures that it achieves better results on average than actively managed mutual funds.
The advantages of ETFs
Additional benefits of ETFs include:
- Diversification: ETFs help you distribute risk and minimize it. By investing in different sectors, with different company sizes, from distinct geographical areas (and various other defining criteria), you give your investment portfolio a unique balance.
- Ease of trading: You can buy and sell at any time of the day, unlike most mutual funds, which trade at the end of the day.
- Transparency: Anyone with Internet access can analyze the price evolution of a particular ETF. Furthermore, the recorded results are also published daily, while in the case of mutual funds this only happens monthly or quarterly. This transparency allows you to closely monitor your investment.
- Ability to enter different trading orders: Since they are traded like stocks, investors can enter a variety of order types, such as limit or stop-loss orders, which is not possible with mutual funds of investment.
Any opinions, research, analyses, prices or other information provided under the heading of general market commentary do not constitute investment advice. Please note that information or research based on historical data does not guarantee future performance or results. Investing is a risky business that carries the possibility of putting your capital at risk and losing money.
Original article published on Money.it Italy 2022-12-20 12:06:00. Original title: Investire in ETF: la guida completa
