What is an Exchange Traded Fund? What are ETFs? (video)
Summary of video: What is an Exchange Traded Fund? What are ETFs? What are ETFs? Another simple way to buy a share of a large index of stocks, like S&P 500. How do they work? (video at 1:35) You can buy as little as one share, or as much as you like. You buy just like a stock. Annual costs are very low because they take away the fund manager. Problems with ETFs (video at 6:47) Potential one-time transaction costs include bid-offer spread and broker commissions. ETFs, like mutual funds, have small tracking error compared to a market index. Potential currency issues for foreign assets. Not all ETFs are good, passive, and low-cost. Stay away from ETFs that are not essentially equivalents to low-cost mutual funds that follow a broad market index. Transcript of What is an Exchange Traded Fund? What are ETFs? What are ETFs? Tim: One of MoneyWeek’s favorite investments is the exchange traded fund, or ETF. In this video I’ll do a beginner’s guide to what exchange traded funds are, why we like them, and in fairness, why they’re not perfect in every situation. They do have one or two drawbacks, and it would only be fair of me to point out what they are. What is an exchange traded fund or ETF? In short, it’s a security, normally a share, that simply tracks an index, a basket of stocks, or something like a commodity, say gold. What’s the point of that? The point of that is this. If you want exposure to, say, the S&P 500 index or the FTSE 100, what better way to get it potentially than to simply buy one share through your broker listed at the London Stock Exchange so it’s nice and easy to get a hold of, it’s got similar charges attached to buying a normal share in a standard company, and that gives you exposure to an entire index, or something that might be quite difficult for you to buy and sell in the commodities market. That’s the point of exchange traded funds in a nutshell. These are listed shares typically that give you exposure directly to something else, and that something else is typically an index, a basket of, say, shares, or a commodity. How do ETFs work? (video at 1:35) How do they work? Basically I could telephone my broker and say I want to buy an exchange traded fund, and I need to pick one. They all have names. Now the earliest ones had snazzy names. A spider [SPDR] was a fund that tracked the S&P 500. A diamond was a fund that tracked the Dow Jones 30. That’s financial markets wizards being a little bit exciting about the way they name products, but these days there are loads of ETFs that track all kinds of indices, so I need to be sure about what I’m asking for. If I want something that tracks the S&P 500 I might indeed ask for the spider, which is […]
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