Table of Contents
1. What are ETFs?
ETFs are securities that track a group of assets, such as stocks, bonds, or commodities. They are traded on exchanges like stocks and can be bought and sold throughout the day.
2. How do they work?
They work by tracking an index, such as the S& P 500 or the NASDAQ 100. When you invest in an ETF, you buy a piece of the index that it tracks. It means that you benefit from
the index’s performance without investing in each security that makes up the index.
3. What are the benefits of investing in ETFs?
They offer diversification.
ETFs offer diversification by allowing you to invest in a basket of assets with a single investment. This diversification can help protect your portfolio from the volatility of any one security.
They are low cost.
ETFs tend to have lower fees than other types of investments, such as mutual funds. They are not actively managed and do not have the same expenses as mutual funds.
They are tax-efficient.
ETFs are generally more tax-efficient than other types of investments, such as mutual funds. They are not actively traded and therefore do not generate capital gains.
They offer exposure to foreign markets.
ETFs offer exposure to foreign markets that may be difficult to access for individual investors. For example, you can invest in an ETF that tracks the Japanese stock market without opening a brokerage account in Japan. Using brokers like https://www.home.saxo/en-sg/products/etf who are global also makes it easier to invest in various regions.
They are flexible.
ETFs, offer investors flexibility when it comes to investing. For example, you can use ETFs to hedge against the risk of a stock market decline.
They are liquid.
They are traded on exchanges like stocks and can be bought and sold throughout the day. This liquidity allows investors to quickly and easily access their money if they need it.
They offer exposure to niche markets.
ETFs offer exposure to niche markets that may be difficult to access for individual investors. For example, you can invest in an ETF that tracks the Chinese stock market without opening a brokerage account in China.
They are convenient.
ETFs are a convenient way to invest in a basket of assets with a single investment. This convenience allows investors to save time and money by not investing in each security that makes up the index. ETFs are a convenient way to invest in a basket of assets with a single investment. This convenience allows investors to save time and money by not investing in each security that makes up the index.
4. What are the risks of investing in ETFs?
They are subject to market risk.
They are subject to the same risks as any other investment, including market risk. It means that their value can go up or down, and you could lose money if you invest in an ETF.
They are subject to tracking errors.
Tracking error is the difference between the performance of an ETF and the index it tracks. It can be caused by many factors, including fees, expenses, and how the ETF is constructed.
They are subject to liquidity risk.
Liquidity risk is the risk that you will not be able to sell your ETF shares at a price you are happy with due to a lack of buyers in the market. This risk is usually higher for less-liquid ETFs.
They are subject to issuer risk.
Issuer risk is the risk that the company that issues an ETF will go bankrupt, and you will lose your investment. This risk is higher for smaller, lesser-known issuers.
They are subject to tracking drift.
Tracking drift is the tendency of an ETF to slowly drift away from its index due to fees, expenses, and other factors. It can cause the performance of the ETF to differ from the performance of the index it tracks.
They are subject to regulatory risk.
Regulatory risk is the risk that new regulations will be enacted that could adversely affect the value of an ETF. This risk is higher for ETFs that track foreign markets or are involved in complex financial instruments.
