What is an ETF
Per Investopedia: An exchange-traded fund (ETF) is a type of pooled investment security that operates much like a mutual fund (unit trust in SA). Typically, ETFs will track a particular index, sector, commodity, or other assets, but unlike mutual funds, ETFs can be purchased or sold on a stock exchange the same way that a regular stock can.
An ETF can be structured to track anything from the price of an individual commodity to a large and diverse collection of securities. ETFs can even be structured to track specific investment strategies.
….it owns shares like a unit trust so you could own R1000 of the whole JSE (Joburg Stock Exchange) for example.
Warren Buffett recommended the S&P 500 ETF why? Not only can it see significant earnings over time (sometimes more than actively managed funds), but it’s also one of the safest investments out there after saving.
Key Features
An ETF, short for Exchange-Traded Fund, is a type of investment fund that trades on stock exchanges, similar to individual stocks. It is designed to track the performance of a specific index, sector, commodity, or asset class. ETFs offer investors an opportunity to gain exposure to a diversified portfolio of assets without directly owning the underlying securities.
Here are some key characteristics and features of ETFs:
1. Diversification: ETFs typically hold a basket of different securities, such as stocks, bonds, or commodities. By investing in an ETF, investors gain exposure to a diversified portfolio, which helps spread risk across multiple assets.
2. Index-tracking: Many ETFs are designed to track the performance of a specific index, such as the S&P 500 or a bond index. These ETFs aim to replicate the performance of the underlying index by holding the same securities in the same proportion as the index.
3. Exchange-traded: ETFs trade on stock exchanges, just like individual stocks. They can be bought and sold throughout the trading day at market prices. This provides investors with liquidity and the ability to enter or exit positions at any time during market hours.
4. Transparency: ETFs disclose their holdings on a daily basis, allowing investors to see the underlying assets they own. This transparency helps investors understand the composition and risks of the ETF.
5. Lower costs: ETFs generally have lower expense ratios compared to actively managed mutual funds. Since most ETFs aim to passively track an index, they have lower management fees and operating expenses.
6. Flexibility: ETFs offer flexibility in terms of investment strategies. Investors can use ETFs to gain exposure to specific sectors, countries, or investment themes. They can also be used for tactical asset allocation, hedging, or diversification purposes.
7. Dividends and capital gains: ETFs may distribute dividends or capital gains to investors based on the income generated by the underlying securities. These distributions can be reinvested or received as cash.
It’s important to note that ETFs are traded on stock exchanges, and their prices can fluctuate throughout the trading day based on supply and demand. This means that the market price of an ETF may differ slightly from its net asset value (NAV), which represents the underlying value of the securities held by the ETF.
Overall, ETFs provide investors with a convenient and cost-effective way to gain exposure to a wide range of asset classes and investment strategies. They offer diversification, liquidity, and transparency, making them a popular choice for individual investors and institutional investors alike.
My best part of them is the low cost easily accessible part. We cannot control much but one thing we need to be mindful of is the costs! I have invested in multiple ETFs as they are core to the backbone of my investment philosophy.
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