ETFs Explained: Letting The Stock Market Do The Work For You
Stock picking, not your thing? See Why Investing In ETFs Can Help Reduce The Risk In Your Portfolio
Investing doesn’t have to be complicated or require you to be monitoring the market closely. ETFs are an easy way to invest. A way that will leave you with a low upfront cost. A way that is flexible yet also simple, transparent, easy to trade, and a good opportunity to diversify your portfolio. What is more? Investing in ETFs can make your money do more for you without dealing with the relative complexity of many traditional investment products.
ETFs almost go hand-in-hand with retirement investing. They are great investment vehicles for long-term buy-and-hold investing. Luckily for you, Freedom24 has your back giving you access to a really wide range of ETFs from all over the world.
Whether you’re an individual looking to invest, or a financial professional, ETFs are an easy and powerful investment option to help meet your goals. How will they do that? To a large extent, they will do it for you! ETFs can be used by investors who do not have (or do not want) to devote time to the analysis required to build a diversified portfolio on their own.
But What Exactly is an ETF?
ETFs come in all flavors. An ETF is a type of investment fund that aims to track the performance of a specific stock market index – like the Hang Seng Index or S&P 500 – an industry sector, or asset. You could think of it as a “basket” that includes various investment products such as stocks, bonds, etc., and just like stocks can be bought or sold on a Stock Exchange at any point during market hours.
Let me bottom-line this for you. As I mentioned before, when you buy an ETF you take ownership of the entire “basket” of underlying investment products that it includes. If, for example, you buy an ETF that follows the S&P 500 index then you get a small chunk of America’s 500 largest companies. Let’s say you start with an investment of 10000€. If the S&P 500 index value rises 10% after the first year (which historically is the case for the specific index), your profit will lie around 1000€ due to minimal management fees. That’s it! You’re done without even lifting a finger!
Why You Should Consider Them For Your Portfolio
Choosing the right investment is like choosing a new car. You want something that suits your needs. An option that is as safe as possible, has good value and is reliable. Many are those who compare ETFs with stocks and mutual funds. They do combine certain key features of both stocks and managed funds but what you need to know is that ETFs can give you the best of both worlds!
⮕ ETFs as "stocks of stocks"
Just like stocks, ETFs can be bought and sold whenever the market is open. Yet, ETFs are more diverse than investing in individual stocks. Instead of buying a handful of individual stocks, by investing in an ETF, you would get exposure to a multitude of stocks. Let’s say, for instance, that you want to invest 500€ in Amazon stock. Then the performance of your portfolio completely depends on the performance of this individual stock. So in case, Amazon’s value takes a turn for the worse, so will your portfolio. Instead, if you invest 500€ in an ETF that tracks the S&P 500 index (which includes Amazon stock), then a fall of Amazon stock would not affect your entire portfolio. The other stocks included could balance out any potential loss. Remember: You don’t have to put all your eggs in the same basket! ETF gives you instant diversification with one simple trade. And you’ve left with reduced risk while maximizing returns.
⮕ ETFs as hands-off investments
ETFs are often compared to mutual funds and just like mutual funds, ETFs are a basket of stocks, bonds, or other assets. In the case of managed funds, a fund manager actively manages and invests money into a basket of different assets and securities – often stocks. You pay the manager in the hope they drive better performance than the market performance. But this is not the case with ETFs. They are usually lower-cost compared to managed funds. This is because ETF investments don’t need a fund manager. They follow a passive management scheme. ETFs will leave you with no surprises because you know a good ETF will aim to closely match the performance of the underlying index that it invests in.
You get the feeling, right? ETFs consist of a combined and better way to invest because:
✅ They’re low cost – usually much cheaper than mutual funds
✅ Offer diversification benefits
✅ Give instant access to a wide range of markets
✅ They are transparent – You know what you’re getting
✅ They are easily traded
Risks of ETFs - Is It Worth Investing?
At this point, you should know that all forms of trading and investing involve some degree of risk, and ETF trading and investing are no different. Risk always affects the value of your investment. Always keep in mind that past performance is not an indicator of future returns. So for every investment decision, you need to be aware of and comfortable with the level of risk to take.
Hint: Either being an experienced investor or you’re just starting your journey into the world of investing and trading, what you should definitely know is that you can’t eliminate risk completely but you can reduce it in many ways. Mainly by choosing the appropriate investment vehicles.
So is it worth investing in ETFs? The short answer is yes! Let’s think about a worst-case scenario: Let’s say that the stock market as a whole takes a turn for the worse…What happens with my ETFs? My index ETFs are likely to be affected as well. However, compared to holding individual stocks, experts say index ETFs are much less risky since they provide efficient diversification. That’s what makes ETFs a possible “safer” form of investment compared to other investment options.
Are ETFs Good For Long-term Investing?
If you are one of those short-term investors then ETFs are definitely not for you! But if you are one of those who have long-term investment horizons (10, 20 to 30 years) then probably ETFs are the most suitable investment option for you.
Most ETFs are known for being “set it and forget it” types of investments. All you have to do is invest regularly and leave your money alone. The fund will take care of the rest without you having to lift a finger.
So If you’re happy with a more long-term and hands-off investment, that’s fantastic: Maybe consider investing in ETFs.
What’s The Best Way To Do It?
Of course with the proper online broker just like Freedom24. It is an excellent choice for long-term investors who want to make a few moves due to its special billing system and its security. All you have to do is connect to the web terminal and enter the ETF you are looking for. You will find the most popular ETFs from companies like Vanguard, iShares, and Amundi there.
You can create a new investment account at Freedom24 in minutes, completely free, and completely from your mobile phone or computer. And guess what…all ETF trades come with 0% commission for the first 30 days upon account creation!
You just have to create your account by filling in your email, username, and password and then verify your details to confirm your account. And that’s it! You’re done.
ETFs are getting more popular by the day and the selection has never been higher for good reason. Investing in them for sure is an easy way to get started in the market. So consider your options, and then buy the best ETFs for you, building your way into a great Portfolio!