Methodology

Investing Basics

Module 2

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Exchange Traded Funds

Exchange Traded Funds

An exchange-traded fund (ETF) is a type of collective investment, that can either operate like a closed-ended or open-eded fund. Exchanged traded funds specifically track a stock market index, the performance of a sector, a commodity, or other assets. For instance, an ETF may be developed to track the FTSE 100 index in London. It would essentially use the funds invested by investors to mirror the FTSE 100, buying all 100 stocks that feature in the index.

 

The aim of an ETF is to match the performance of a particular group of stocks (i.e. in an index or sector), enabling investors to gain exposure to them.  Much like closed-ended funds, ETFs are bought and sold on the stock market, in the same way that stocks are bought and sold. 

 

The most famous ETF is the Vanguard S&P 500 fund, as it is widely discussed in the media. It can be bought and sold through an ordinary stockbroker.

Passive and active ETFs

When you think of an investment fund, you may assume that the fund has a manager that uses their expertise to make sure that the fund is performing well. Although this is the case with other funds, the majority of ETFs do not have a manager at all. Instead, the fund is set up to track certain investments and is then left on its own.

 

This may sound concerning but numerous research studies have shown that funds that do not have a manager, usually perform better than funds that do have a manager. This is primarily because they avoid the human errors that managers make, which lower returns. Passively managed funds allow investors to gain exposure to a certain group of investments, without anybody influencing how the portfolio performs.

 

With that said, a minority of ETFs are actively managed and have a fund manager. Actively managed ETFs do not necessarily track any particular group of stocks and instead follow the portfolio that have been created by the fund manager. Actively managed ETFs are more expensive to invest into, which is worthwhile on the rare occasion that the manager is extremely talented and can deliver high returns.

Examples of popular ETFs

As previously stated, in order to invest in an ETF, you simply need to sign up with a stockbroker and invest via their platform. That might sound easy, but if you are not sure what ETFs to actually invest in, there will be a problem.

 

Here, we will list examples of some of the most popular ETFs available.

 

It is important to note that we are not advising you to invest in any of these ETFs, we are simply trying to give you an idea of some of the ETFs available.

 

The most popular ETFs are:

 

  • The SPDR S&P 500
  • The iShares Russell 2000
  • The Invesco QQQ
  • The SPDR Dow Jones Industrial Average
  • iShares MSCI Emerging Markets ETF
  • Energy Select Sector SPDR Fund

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