What Is An ETF?

𝙒𝙝𝙖𝙩 𝘼𝙧𝙚 𝙀𝙏𝙁'𝙨?

ETF’s (Exchange traded funds) are essentially a basket which holds small positions in lots of different companies, commodities, bonds or other assets. They generally target specific areas of the market such as biotech, cloud computing, EV etc. ETF’s can be traded exactly like any other asset on the markets, you can go long, short or even use leverage. They are usually relatively low cost with a fraction of a percent usually charged to ‘manage’ the fund.

𝙒𝙝𝙮 𝙄𝙣𝙫𝙚𝙨𝙩 𝙄𝙣 𝘼𝙣 𝙀𝙏𝙁?

ETF’s give us a diversified portfolio within a specific sector. Let’s say for example you are interested in Solar energy. There are countless solar companies to choose from and to analyse each of them would take you weeks! You could take a punt on a few big names but you could be missing a few smaller names that are ready to pop! With an ETF like $TAN it gives you exposure to around 30-50 companies (depending on the ETF) in one trade. Now of course, individual stock picking can be more financially rewarding IF you manage to pick the right stock. An ETF will benefit from the gains of that individual stock, but remember, the gains will be reduced by the losses of the other companies within the fund.

ETF’s can also be great to gain exposure to sectors of the market that you don’t really understand, for example, I don’t understand Genomics so I would look at funds like $ARKG (Please add it eToro!) to give me exposure to some of the top companies within that sector.

𝙈𝙞𝙭𝙞𝙣𝙜 𝙀𝙏𝙁’𝙨 𝙒𝙞𝙩𝙝 𝙎𝙩𝙤𝙘𝙠𝙨

You will notice a lot of people hold ETF’s alongside stocks. For example $ARKK holds nearly 10% in $TSLA (Tesla Motors, Inc.) but people will still hold $TSLA alongside $ARKK. Why is that? If you have 2% of your portfolio in $ARKK your actual exposure to $TSLA is only 0.2% so some people wish to bolster positions in their portfolio with companies they really believe in.

𝘾𝙖𝙣 𝙀𝙏𝙁’𝙨 ‘𝙗𝙚𝙖𝙩’ 𝙩𝙝𝙚 𝙢𝙖𝙧𝙠𝙚𝙩?

ETF’s can be a solid passive play for nearly anyone. Let’s look at the $QQQ. The $QQQ tracks the $NSDQ100 . Over the last 10 years the $QQQ has returned on average 20.08% per year compared to the Nasdaq's 20.42%. Pretty close, right? Most people use the $SPX500 as the benchmark for comparison when checking the performance of their portfolio. The $SPX500 returned just over 13% during the same period so investing the QQQ alone would have been a great play.

Just like everything certain sectors fall out of fashion so you do need to keep up to date with market trends. But if you want to gain exposure to sectors you don’t understand, new trends or want track the markets in general ETF’s are a great way to do just that. Want to trade the stock market but don't know where to begin? Follow me on eToro! 67% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.