What exactly is an ETF?

If you want a simple and straightforward description of what an ETF (exchange-traded fund) is, imagine that you’re buying and selling the ‘shares’ of a mutual fund out on the stock exchange. Of course, that’s not all to it, if you’re able to envision such a thing, you’re halfway towards understanding what an ETF is, and how it works.

Let’s make things a bit more specific. Essentially, an ETF is an investment fund in possession of an array of investments, carefully selected and managed by your fund manager. These can include bonds, stocks, real estate, and all manner of other things… and these investments are split into many, many parts, and sold onto individual investors.

Here at Wealthface, we love working with ETFs, and our clients would more than readily agree. There are many reasons for this, but we feel that one of the most important is that ETFs successfully combines the best of both worlds. They bring together the flexibility of a stock with the diversification of mutual funds, and yet they manage to do this with much lower fees than you’d find in a typical mutual fund.

Still a little confused? Here’s a straightforward example for you. Let’s say you’ve decided to start investing in the stock market. You’ve been told that real estate is a great place to put your money right now, but you’ve decided to go for a simpler and wiser approach than many newbies to the investment world. So, instead of fixing your fortunes to a single stock, you go for an ETF that owns plenty of stock in various real estate firms. This would mean your ETF would be ‘tracking’ real estate – another piece of jargon you’re going to hear a lot more of!

What are the positives of ETFs?

As you might have realized, we’re big ETF fans at Wealthface. Once you’ve taken a look at the various pros associated with them, we think you’ll become one, too.

The main advantage of ETFs is the fact that by their nature, they involve low fees. When you compare an ETF to an equivalent mutual fund, you can see a radical difference; mutual funds can charge over 2% per year, while ETFs fees general stay under 0.3% – and that’s what we like to see!

Why are they so cheap? Quite simply because ETFs don’t work by trying to guess which stocks or bonds are set to become winners on the market, and instead track whole packages of investments. As a result, fund managers don’t need to make so many trades with ETFs, and fewer trades mean lower fees.

Good news! There is no minimum amount to invest in ETFs – you don’t have to pay a dime more than the price of an individual share. There isn’t much that’s not straightforward and simple when it comes to ETFs. Because ETFs trade on the stock market, they’re easy to buy and sell, and you’ll be able to see the benefits they bring.

If losing out on dividend payments is something that concerns you, you’ll also find plenty to love in ETFs – ETF funds collect dividends from their various companies and pass those funds onto you, the investor. Can you now see why more and more people are turning to Wealthface and ETFs? It’s clear as day that ETFs offer the best components of both stocks and mutual funds, and can maximize your wealth while minimizing risk… and that’s the Wealthface approach all the way.

Factors to bear in mind

It’s important to remember that while ETFs are certainly cheaper than mutual funds and other types of investments, they aren’t free. If you wanted to pay less money on your portfolio, you could consider buying all of those individual stocks and bonds which the ETF invests in. While this could technically save you a bit of money, we’d suggest that the time and effort it would involve would be better put into further growing your wealth!.

Yet, you’ll need to bear in mind that there will be a small commission fee whenever you’re buying and selling units, and the size of that fee depends on the broker and their terms and conditions.

When you’re dealing with any diversified funds, you do have somewhat smaller chances for big gains than you would if you were to buy individual stock. But we believe in minimizing risk alongside maximizing returns, so while this might be true, the chances of losing your investment is considerably smaller, too.

Lastly, do remember that there are minimum commission fees for buying and selling units. It will depend on the broker used, but Wealthface is on hand to take the stress out of the process every step of the way.

Wealthface – Wealth Management at Your Fingertips